How do investors react under uncertainty?

Bird, R; Yeung, D

How do investors react under uncertainty?

Bird, R

Yeung, D

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Publication Type:: Journal Article
Citation:: Pacific Basin Finance Journal, 2012, 20 (2), pp. 310 - 327
Issue Date:: 2012-04-01

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Field	Value	Language
dc.contributor.author	Bird, R https://orcid.org/0000-0003-0524-9377	en_US
dc.contributor.author	Yeung, D https://orcid.org/0000-0002-3032-0449	en_US
dc.date.issued	2012-04-01	en_US
dc.identifier.citation	Pacific Basin Finance Journal, 2012, 20 (2), pp. 310 - 327	en_US
dc.identifier.issn	0927-538X	en_US
dc.identifier.uri	http://hdl.handle.net/10453/18892
dc.description.abstract	It has long been accepted that risk plays an important role in determining valuation where risk reflects that investors are unsure of future returns but are able to express their prior expectations by a probability distribution of these returns. Knight (1921) introduced the concept of uncertainty where investors possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. One common approach for making uncertainty tractable is to assume that investors faced with uncertainty will base their decisions on the worst case scenario (i.e. follow maxmin expected utility). As a consequence it is postulated that investors will become more pessimistic as uncertainty increases, upgrading bad news and downgrading good news. Using Australian data, we find evidence that investors react to bad news at times of high market uncertainty but largely ignore good news which is consistent with them taking on a pessimistic bias. However, we also find evidence of the reverse when market uncertainty is low with investors taking on an optimistic stance by ignoring bad news but reacting to good news. We also find that the impact that market uncertainty has on the reaction of investors to new information is modified by the prevailing market sentiment at the time of the announcement. Besides throwing light on the question of how uncertainty impacts on investor behaviour, our findings seriously challenge the common assumption made that investors consistently deal with uncertainty by applying maxmin expected utility. © 2011 Elsevier B.V.	en_US
dc.relation.ispartof	Pacific Basin Finance Journal	en_US
dc.relation.isbasedon	10.1016/j.pacfin.2011.10.001	en_US
dc.subject.classification	Finance	en_US
dc.title	How do investors react under uncertainty?	en_US
dc.type	Journal Article
utslib.citation.volume	2	en_US
utslib.citation.volume	20	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
utslib.for	1501 Accounting, Auditing and Accountability	en_US
dc.location.activity	Istanbul, Turkey
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
utslib.copyright.status	closed_access
pubs.issue	2	en_US
pubs.publication-status	Published	en_US
pubs.volume	20	en_US

Abstract:

It has long been accepted that risk plays an important role in determining valuation where risk reflects that investors are unsure of future returns but are able to express their prior expectations by a probability distribution of these returns. Knight (1921) introduced the concept of uncertainty where investors possess incomplete knowledge about this distribution and so are unable to formulate priors over all possible outcomes. One common approach for making uncertainty tractable is to assume that investors faced with uncertainty will base their decisions on the worst case scenario (i.e. follow maxmin expected utility). As a consequence it is postulated that investors will become more pessimistic as uncertainty increases, upgrading bad news and downgrading good news. Using Australian data, we find evidence that investors react to bad news at times of high market uncertainty but largely ignore good news which is consistent with them taking on a pessimistic bias. However, we also find evidence of the reverse when market uncertainty is low with investors taking on an optimistic stance by ignoring bad news but reacting to good news. We also find that the impact that market uncertainty has on the reaction of investors to new information is modified by the prevailing market sentiment at the time of the announcement. Besides throwing light on the question of how uncertainty impacts on investor behaviour, our findings seriously challenge the common assumption made that investors consistently deal with uncertainty by applying maxmin expected utility. © 2011 Elsevier B.V.

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http://hdl.handle.net/10453/18892