Review of Financial Studies 2026
What Hundreds of Economic News Events Say About Belief Overreaction in the Stock Market
Abstract
We measure the nature and severity of a variety of belief distortions in market reactions to hundreds of economic news events by synthesizing structural estimation with algorithmic machine learning to quantify bias. We find that investors systematically overreact to perceptions about multiple fundamental shocks, a phenomenon we show often dampens rather than amplifies market volatility via a “shock composition effect.” Such effects imply that the stock market can underreact to news, even when investors overreact to all shocks.
- DOI
- 10.1093/rfs/hhag062
- Language
- en
- Sources
- crossref