Managing Overreaction During a Run

Caio Machado

No 574, Documentos de Trabajo from Instituto de Economia. Pontificia Universidad Católica de Chile.

Abstract: This paper studies whether suspensions intended to provide a time-out for agents to digest incoming information attenuate runs, under the assumption that agents overreact to news and need time to properly process it. To do so, I embed diagnostic expectations into a standard global game model of runs. I show that during bad times, when bad public news arrives and/or investment returns are low, such policy actually amplifies runs, even in cases where almost all investors are receiving negative news and temporarily overreacting to it. During good times, the opposite result arises.

Keywords: global games; overreaction; diagnostic expectations; runs (search for similar items in EconPapers)
JEL-codes: D84 D91 G41 (search for similar items in EconPapers)
Date: 2023
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https://www.economia.uc.cl/docs/doctra/dt-574.pdf (application/pdf)

Related works:
Working Paper: Managing Overreaction During a Run (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:ioe:doctra:574

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