A model of regret, investor behavior, and market turbulence

Jie Qin

Journal of Economic Theory, 2015, vol. 160, issue C, 150-174

Abstract: This study examines the effects of regret on investor behavior and market turbulence by using a model where investors not only regret wrong actions but also regret inaction. We demonstrate that regret aversion can cause investors to ride a bubble, exit and reenter the market, or choose not to trade. Further, herds and partial herds can occur in the market, and we show that the stronger regret over inaction, the easier it is for herds to occur. The model presented herein also predicts that during the formation of a bubble (crash), bearish (bullish) traders tend to exit and reenter the market, thereby causing a positive (negative) correlation between order volume and order imbalance.

Keywords: Regret over inaction; Regret aversion; Bubble; Herd; Market participation; Order imbalance (search for similar items in EconPapers)
JEL-codes: D81 G12 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0022053115001696
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:160:y:2015:i:c:p:150-174

DOI: 10.1016/j.jet.2015.08.010

Access Statistics for this article

Journal of Economic Theory is currently edited by A. Lizzeri and K. Shell

More articles in Journal of Economic Theory from Elsevier
Bibliographic data for series maintained by Catherine Liu ().