Psychological Aspects of Large Stock Price Changes

Andrey Kudryavtsev

Chapter 12 in Behavioral Finance:The Coming of Age, 2019, pp 401-427 from World Scientific Publishing Co. Pte. Ltd.

Abstract: Large stock price changes are supposed to be a result of considerable company-specific shocks. Yet, actual stock price reactions to these shocks crucially depend on the way investors subjectively treat them, and therefore may be affected by various psychological factors. In this chapter, I sketch the picture emerging from two studies of mine dealing with psychological aspects of the large stock price changes and the subsequent stock returns. These studies demonstrate that stock returns following an initial price shock are significantly related to the direction of the contemporaneous stock market index return and of the contemporaneous change in the value of VIX index on the day when the shock takes place. I attribute these findings to the effects of the availability heuristic and mood on investors’ behavior.

Keywords: Behavioral Economics; Behavioral Finance; Behavioral Macro-Finance; Decision Making; Disposition Effect; Financial Crisis; Financial Decision-Making; Financial Market Anomalies; Fintech; Gender Differences; Heuristics; Information Processing Style; International Contagion Market Design; Monetary Policy; Mood; Optimal Portfolio; Overreaction; Peer-to-Peer Lending; Political Economics; Time Pressure; Transparency (search for similar items in EconPapers)
JEL-codes: G30 G41 (search for similar items in EconPapers)
Date: 2019
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