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Icrnary 19. 199 Commcnis Wclcomc
A Thoory of Ovorconhdonco, SoIf-AttrIIutIon,
nnd SocurIty ^nrkot lndor- nnd Ovor-ronctIons
Icni Danicl
+
Davio Hirsllcilcr
++
Avaniolar Snralmanyam
+++
Wo lhunl Michuol Lionnun, Llulo LoLuion, Cunico Iionooigusl, Mull Spiogol, uno Siow Hong 1ooh foi
holpful connonls uno oiscussions, IoLoil Nouh foi oxcollonl iosouich ussislunco, uno puilicipunls in lho
Milsui Lifo Finunco Woilshop ul lho Univoisily of Michigun, lho NLLI Assol Iiicing Mooling ul Noilh-
wosloin Univoisily, uno lho Noilhwosloin uno UCLA lnunco woilshops foi holpful connonls. Hiishloifoi
lhunls lho Nippon 1olophono uno 1ologiuph Iiogiunof Asiun Finunco uno Lcononics foi lnunciul suppoil.
A
Finunco Dopuilnonl, Kollogg School of Munugononl, Noilhwosloin Univoisily, Lvunslon, IL 60208-2006;
847-401-4118; lonlonwu.oou
AA
School of Lusinoss Aoninisliulion, Univoisily of Michigun, Ann AiLoi; 701 1uppun Sliool, Ann AiLoi,
MI 48100-1284; (818) 764-188; ouvio.hiishloifoiccnuil.Lus.unich.oou.
AAA
Anooison Giuouulo School of Munugononl, Univoisily of Culifoiniu ul Los Angolos, Los Angolos, CA
0000-1481; (810) 82-8; suLiuunooison.uclu.oou
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A Thoory of Ovorconhdonco, SoIf-AttrIIutIon,
nnd SocurIty ^nrkot lndor- nnd Ovor-ronctIons
Asiraci
Wc jrojosc a ilcory asco on invcsior ovcrconnocncc ano iasco scll-aiiriniion io
cxjlain scvcral ol ilc sccnriiics rcinrns jaiicrns ilai sccm anomalons lrom ilc jcrsjcciivc
ol cmcicni markcis wiil raiional invcsiors. 1lc ilcory is asco on iwo jrcmiscs ocrivco lrom
cviocncc in jsycloloical sinoics. 1lc nrsi is ilai inoivionals arc ovcrconnocni aoni ilcir
ailiiy io cvalnaic sccnriiics. in ilc scnsc ilai ilcy ovcrcsiimaic ilc jrccision ol ilcir jrivaic
inlormaiion sinals. 1lc sccono is ilai invcsiors` connocncc clancs in a iasco laslion
as a lnnciion ol ilcir occision onicomcs. 1lc nrsi jrcmisc imjlics ovcrrcaciion io jrivaic
inlormaiion arrival ano nnocrrcaciion io jnlic inlormaiion arrival. 1lis is consisicni wiil
(1) josi-corjoraic cvcni ano josi-carnins annonnccmcni siock jricc orili`. (2) ncaiivc
lon-la aniocorrclaiions (lon-rnn ovcrrcaciion`). ano (3) cxccss volaiiliiy ol assci jriccs.
Aooin ilc sccono jrcmisc lcaos io (4) josiiivc slori-la aniocorrclaiions (momcninm`).
ano () slori-rnn josi-carnins annonnccmcni orili.` ano ncaiivc corrclaiion ciwccn
lninrc siock rcinrns ano lon-icrm mcasnrcs ol jasi acconniin jcrlormancc. 1lc moocl
also oncrs scvcral nnicsico cmjirical imjlicaiions ano imjlicaiions lor corjoraic nnancial
jolicy.
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1 IntroductIon nnd Sunnnry
In rcccni ycars a larc ooy ol cviocncc on sccnriiy rcinrns las jrcscnico a slarj clallcnc
io ilc iraoiiional vicw ilai sccnriiics arc raiionally jricco io rcncci all jnlicly availalc
inlormaiion. Scvcral sinoics lavc jlrasco conclnsions in icrms ol markci nnocrrcaciion
or ovcrrcaciion io ncw inlormaiion. Somc ol ilc morc noialc anomalics inclnoc: (1) nn-
ocrrcaciion io jnlic ncws cvcnis (jnlic-cvcni-oaic avcrac siock rcinrns ol ilc samc sizc
as avcrac snscqncni lon-rnn anormal jcrlormancc).
1
(2) slori-icrm momcninm (jos-
iiivc slori icrm aniocorrclaiion ol siock rcinrns. lor inoivional siocks ano ilc markci as
a wlolc).
2
(3) lon-icrm rcvcrsal (ncaiivc aniocorrclaiion ol slori-icrm rcinrns scjaraico
y lon las. or ovcrrcaciion).
8
(4) nnconoiiional cxccss volaiiliiy ol assci jriccs rclaiivc
io lnnoamcnials.
4
() slori-rnn josi-carnins annonnccmcni siock jricc orili` in ilc oircc-
iion inoicaico y ilc carnins snrjrisc.

ano (0) anormal siock jricc jcrlormancc in ilc

ojjosiic oircciion ol lon-icrm carnins clancs.
6
1lcrc rcmains siron oisarccmcni ovcr ilc inicrjrciaiion ol ilis cviocncc ol jrcoiciail-
iiy. In ilc ascncc ol ariirac. a josiiivc jricin kcrncl cxisis ilai jriccs all asscis. 1lc
qncsiion is low rcasonalc a raiional cqnilirinm moocl nnocrlyin sncl a kcrncl,moocl
l
Lvonls foi which lhis hus Loon founo incluoo slocl splils (GiinLlull, Musulis, uno 1ilnun (1084), Do-
sui uno Juin (1006), uno IlonLoiiy, Iunlino, uno Slico (1006)), lonooi oloi uno opon nuilol iopuichusos
(Lulonishol uno Voinuolon (1000), IlonLoiiy, Lulonishol, uno Voinuolon (100)), unulysl ioconnonou-
lions (Giolh, Lowollon, SchuiLuun, uno Louso (1070), Ljoiiing, Lulonishol, uno Voinuolon (1088), Lllon,
GiuLoi, uno Gullolin (1084), Wonucl (1006), uno Michuoly uno Wonucl (1006)), oivioono iniliulions uno
onissions (Michuoly, 1huloi, uno Wonucl (100)), sousonoo issuos of connon slocl (Loughiun uno Iilloi
(100), Spioss uno Alocl-Giuvos (100), 1ooh, Wolch, uno Wong (1006)), ouinings suipiisos (ul lousl foi
u poiioo ufloi lho ovonl; (Loinuio uno 1honus (1080, 1000), Liown uno Iopo (1006)), puLlic unnounco-
nonl of piovious insiooi liuoos (Soyhun (1086), Soyhun (1088) uno Iozol uno Zunun (1088); howovoi,
lho uLnoinul piolls lo oulsioois oo nol oxcooo lho ussociuloo Lio-usl uno liunsuclions cosls), uno vonluio
cupilul shuio oisliiLulions (Gonpois uno Loinoi (100)). 1hoio is ulso ovioonco lhul ouinings foiocusls un-
ooiioucl lo puLlic nows, such us guuiloily ouinings unnouncononls (ALuiLunoll uno Loinuio (1001, 1002),
Monoonhull (1001)).
2
Joguooosh uno 1ilnun (1008), Duniol (1006); Shoil` hoio iofois lo poiioos on lho oiooi of 6-12 nonlhs.
Al voiy shoil hoiizons lhoio is nogulivo uulocoiiolulion in inoiviouul slocl ioluins (Joguooosh (1000) uno
Lohnunn (1000)), Lul lhis nuy iosull fion Lio-usl spiouos uno olhoi nousuiononl pioLlons (Kuul uno
Ninulonoiun (1000)).
3
Cioss-soclionully, soo DoLonol uno 1huloi (108, 1087), Chopiu, Lulonishol, uno Iilloi (1002); on
ioLuslnoss issuos, soo Funu uno Fionch (1006). Foi lho uggiogulo nuilol, soo Funu uno Fionch (1088) uno
IoloiLu uno Sunnois (1088); on lho ioLuslnoss of lho lnoing in lho posl-WWII poiioo, soo Kin, Nolson,
uno Sluilz (1088) uno Duniol (1006); lho lulloi lnos lhul lho long-hoiizon nogulivo uulocoiiolulion is puilly
nusloo Ly u nuilol nononlun olocl (posilivo soiiul coiiolulion) ul uppioxinuloly u ono youi hoiizon.
d
Shilloi (1081), Shilloi (1080); on lho ioLuslnoss of lhis lnoing, soo Kloioon (1086); Muish uno Moilon
(1086).
5
Loinuio uno 1honus (1080, 1000).
o
Lulonishol, Shloifoi, uno Vishny (1004), Lu Ioilu, Lulonishol, Shloifoi, uno Vishny (100); soo howovoi
DoChow uno Sloun (100).
1
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wonlo c. Lasco on ilc lil Slarjc-raiios (rclaiivc io ilc markci) ajjarcnily aclicvalc
wiil simjlc iraoin siraicics. any assci jricin moocl consisicni wiil ilcsc jaiicrns wonlo
lavc io lavc cxircmcly varialc marinal niiliiy across siaics.
7
Morcovcr. io cxjlain ilc
varions cross-scciional jrcoiciailiiy rcsnlis (on sizc. ook-io-markci. ano momcninm. lor
cxamjlc) sncl a moocl wonlo rcqnirc ilai marinal niiliiics vary sironly wiil ilc rc-
inrns on sizc. ook-io-markci ano momcninm jorilolios. `o sncl corrclaiion is ovions
in cxaminin ilc oaia. Givcn ilis cviocncc. ii sccms rcasonalc io consiocr qnasi-raiional
cxjlanaiions lor ilc oscrvco rcinrn jaiicrns.
Morcovcr. ilcrc arc imjoriani corjoraic nnancin ano jayoni jaiicrns wlicl sccm
joicniially rclaico io markci anomalics. Iirms icno io issnc cqniiy (railcr ilan oci) alicr
riscs in markci valnc. ano wlcn ilc nrm or inonsiry ook,markci raiio is low. 1lcrc arc
inonsiry-sjccinc nnancin ano rcjnrclasc ooms. jcrlajs ocsinco io cxjloii inonsiry-lcvcl
misjricins. 1ransaciions sncl as iakcovcrs ilai olicn rcly on sccnriiics nnancin arc also
jronc io inonsiry ooms ano qnici jcrioos.
S
Alilonl ii is noi ovions low ilc cmjirical sccnriiics markci jlcnomcna can c caj-
inrco jlansily in a moocl asco on jcrlcci invcsior raiionaliiy. no jsycloloical (c-
lavioral) ilcory lor ilcsc jlcnomcna las won cncral acccjiancc. Somc asjccis ol ilc
jaiicrns sccm coniraoiciory. sncl as ajjarcni markci nnocrrcaciion in somc conicxis ano
ovcrrcaciion in oilcrs. Wlilc cxjlanaiions lavc ccn oncrco lor jariicnlar anomalics. wc
lavc lackco an inicraico ilcory io cxjlain ilcsc jlcnomcna.
9
A criiicism olicn raisco y cconomisis aainsi jsycloloical ilcorics is ilai. in a ivcn
7
MucKinluy (100) uiguos lhul sizoLool-lo-nuilol sliulogios pioouco oxcossivoly high Shuipo iulios.
CunpLoll uno Cochiuno (1004) lno lhul u ulilily funclion wilh oxliono huLil poisislonco is ioguiioo lo
oxpluin lho lino soiios pulloins in nuilol ioluins; piosunuLly uny noool which oxpluinoo lho cioss-soclionul
pulloins us woll woulo ioguiio ovon noio oxliono vuiiuLilily in nuiginul ulililios.
S
Soclion oovolops fuilhoi inpliculions foi nunugoiiul policy. 1hoso incluoo lho inpliculions lhul u
iulionul nunugoi ucling in lho inloiosl of cuiionl shuioholoois shoulo (1) issuo ufloi u iiso in lho lin`s slocl
piico, (2) fuvoi puLlic ovoi iighls issuos ufloi u piico iunup, (8) piofoi ooLl ovoi oguily ovoi issuos ufloi
u piico iunoown, uno (4) piofoi iopuichuso ovoi oivioonos ufloi u piico iunup. 1ho unulysis ulso inplios
lhul if nunugois ucl lo oxploil nispiicing, lhoio will Lo Lolh gonoiul uno inousliy-spocilc lnuncing uno
iopuichuso Loons.
9
Duniol, Hiishloifoi, uno SuLiuhnunyun (1007) show lhul lho ovoiconloonco uppiouch cun ulso Lo up-
plioo lo oxpluin inpoilunl unonulios ioluling lo iisl nousuios uno lo funounonlul piooiclois of socuiily
ioluins. 1hoso puzzlos incluoo: (1) u posilivo ussociulion Lolwoon piico-sculoo funounonlul nousuios (oiv-
ioono yiolo, ouiningspiico, uno Loolnuilol) uno fuluio slocl nuilol ioluins, (2) lho uLilily of lin sizo
lo piooicl fuluio ioluins whon sizo is nousuioo Ly nuilol vuluo, Lul nol whon nousuioo Ly Lool vuluo oi
olhoi non-nuilol nousuios, (8) ooninulion of a us u cioss-soclionul piooicloi of slocls` fuluio ioluins Ly
piico oi Ly piico sculoo vuiiuLlos (Loolnuilol, ouiningspiico iulios), uno (4) lho willingnoss of invoslois
lo holo inpoifoclly oivoisiloo poilfolios oospilo lho ul-Losl unLiguous ovioonco ioguioing u pioniun foi
Louiing iosiouul iisl.. 1hoy ulso oxunino lho iolulion Lolwoon piico-sculoo funounonlul vuiiuLlos such us
Loolnuilol iulios uno coipoiulo lnunciul oocisions.
2
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cconomic sciiin. ilc nnivcrsc ol conccivalc irraiional clavior jaiicrns is mncl larcr ilan
ilc sci ol raiional jaiicrns. 1lns. ii is somciimcs claimco ilai allowin lor irraiionaliiy
ojcns a Ianoora`s ox ol ao loc siorics wlicl will lavc liiilc oni-ol-samjlc jrcoiciivc
jowcr. Howcvcr. as DcLonoi ano 1lalcr (199) joini oni. a ooo jsycloloical nnancc
ilcory will c ronnoco on ilc cviocncc lrom jsycloloy aoni low jcojlc acinally clavc.
Wc ilink sncl a ilcory slonlo c nili njon a valio jsycloloical microlonnoaiion ilai
allows lor ilc raiional sioc ol invcsior occisions. 1o ocscrvc consiocraiion a ilcory slonlo
c jarsimonions. cxjlain a :nnj ol anomalons jaiicrns in oincrcni conicxis. ano cncraic
ncw cmjirical imjlicaiions.
1lis jajcr oncrs a ilcory ol sccnriiy jricc anomalics asco on .n: :n]nn.
ano variaiions in connocncc arisin lrom h.nn |]-n:.h&.n. 1lc ovcrconnocncc ilcory
ol sccnriiy jriccs is asco on a larc ooy ol cviocncc lrom coniiivc jsycloloical cxjcr-
imcnis ano snrvcys (snmmarizco in Scciion 2) slowin ilai inoivionals ovcrcsiimaic ilcir
own ailiiics in varions conicxis. In onr moocl. an ovcrconnocni invcsior is onc wlo ovcr-
csiimaics ilc jrccision ol lis jrivaic inlormaiion sinal aoni sccnriiy valnc.
10
Il invcsiors
arc morc ovcrconnocni aoni sinals wiil wlicl ilcy lavc rcaicr jcrsonal involvcmcni.
ilcy will icno io c ovcrconnocni aoni jrivaic inlormaiion sinals (inlormaiion ilcy rc-
ccivc clorc somc oilcr sci ol invcsiors) ilan aoni jnlic sinals (rcccivco simnlianconsly
y all). A oisiinnislin lcainrc ol onr ilcory is ilis oincrcniial connocncc aoni oincrcni
kinos ol sinals.
Snjjosc ilai iraocrs siari ai oaic 0 wiil a common jrior. ano ilcn ai oaic 1 inlormco
iraocrs rcvisc ilcir clicl aoni a sccnriiy or sccnriiics asco njon a common jrivaic sinal.
Iinrc 1 illnsiraics ilc avcrac jricc jail lollowin a josiiivc (njjcr cnrvc) or ncaiivc
(lowcr cnrvc) jrivaic sinal. 1lc njjcr cnrvc is an imjnlsc-rcsjonsc lnnciion: ii slows
ilc cxjccico jriccs conoiiional on a jrivaic sinal ol nnii maniinoc arrivin ai iimc 1.
1lc ooiico linc slows ilc lcvcl ilc jricc wonlo movc io il invcsiors wcrc lnlly raiional.
Inlormco iraocrs arc assnmco io ovcrcsiimaic ilc jrccision ol ilcir jrivaic sinal. ni
noi ol jnlic sinals. As a rcsnli. ilc inlormco ovcrwcili ilc jrivaic sinal rclaiivc io
ilc jrior. cansin ilc siock jricc io ovcrrcaci. Ai oaic 2. wlcn noisy jnlic inlormaiion
sinals arrivc. ilc incmcicni ocviaiion ol ilc jricc will c jariially corrccico. on avcrac.
On snscqncni oaics. as morc jnlic inlormaiion arrivcs. ilc jricc will. on avcrac. movc
siill closcr io ilc lnll-inlormaiion valnc. Wc call ilc jari ol ilc imjnlsc rcsjonsc jrior io
ilc jcak or ironl ilc ::n.n |n. ano ilc laicr scciion ilc ::.n |n.
1lc jaiicrn nsi ocscrico aronno ilc jnlic inlormaiion sinal imjlics ilai ilc josi-
lu
Foi sinilui spocilculions of ovoiconloonco, soo Kylo uno Wung (1006), Oooun (100), uno Wung (100).
3
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Iinrc 1: Avcrac Iricc as a Innciion ol 1imc wiil Ovcrconnocni Invcsiors
1 2 3 3
Favorable Private Signal
Unfavorable Private Signal
Full Information Value
Full Information Value
jnlic-cvcni anormal siock jricc jcrlormancc will icno io c ol ilc samc sin as ilc
anormal siock jricc rcaciion occnrrin ai ilc cvcni oaic (consisicni wiil cviocncc on
varions jnlic cvcnis). 1lns. ilc ovcrall jaiicrn in onr asic (siaiic) moocl is onc wlcrc
siock jriccs ovcrrcaci io jrivaic inlormaiion sinals ano nnocrrcaci io jnlic sinals. In
ilc oynamic vcrsion ol ilc moocl wlcrc scll-connocncc nncinaics in rcsjonsc io connrmin
or oisconnrmin jnlic sinals. ilc ovcrrcaciion io jrivaic inlormaiion can coniinnc ovcr
a jcrioo ol iimc. Alilonl ilcrc rcmains a icnocncy io nnocrrcaci io jnlic inlormaiion.
jnlic inlormaiion can somciimcs iricr lnrilcr ovcrrcaciion io a jrcccoin jrivaic sinal.
1lc rcmainocr ol ilc iniroonciion ocscrics low ilis ajjroacl can cxjlain oilcr cxisiin
anomalics. Scvcral ncw nnicsico or incomjlcicly-icsico imjlicaiions arc jrovioco as wcll.
11
Snjjosc ilai raiionally manaco nrms icno io ny sccnriiics or sinal morc sironly
ll
1ho noool hus lho following fuilhoi onpiiicul inpliculions foi vuiious coipoiulo ovonls lhul uio oilhoi
unlosloo oi huvo Loon conlinoo only on u fow spocilc ovonls, Lusoo on Iioposilions 1-2 uno Iioposilions
6-10: (1) posl-puLlic-nows-ovonl uLnoinul poifoinunco (oilhoi incluoing oi oxcluoing lho ovonl oulo) lhul
is on uvoiugo Lolloi [woiso[ whon funounonlulpiico iulios such us Loolnuilol uio high [low[; (2) A
nogulivo coiiolulion Lolwoon pio-ovonl slocl piico poifoinunco (oilhoi incluoing oi oxcluoing lho ovonl
oulo) uno posl-ovonl slocl piico poifoinunco; (8) u posilivo coiiolulion Lolwoon iniliul ovonl-oulo slocl
piico iouclions uno posl-ovonl poifoinunco (ufloi noinulizing foi conloonco pioxios), (4) loss posl-ovonl
uLnoinul poifoinunco foi iolulivoly non-soloclivo` coipoiulo ovonls (whoio occuiionco of lho ovonl is nol
Lusoo on piivulo infoinulion uLoul lho lin`s piospocls); () posilivo uLnoinul ioluins sluiling ufloi lho
unnouncononl of looholo ownoiship slulos in u lin; (6) sliongoi posl-ouinings oiifl whon lho suipiiso
is nousuioo iolulivo lo foiocusls lhun whon nousuioo iolulivo lo pusl ouinings oi u lino-soiios piooiclion
Lusoo on pusl ouinings; uno (7) Giouloi long-loin iovoisul of piico novos occuiiing on oulos whon lhoio
uio no puLlic nows ovonls uLoul u lin iopoiloo in slunouio souicos lhun piico novos occuiiing on puLlic
ovonl oulos.
4
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7
wlcn manacrs clicvc ilcir siock is nnocrvalnco y ilc markci. ano scll sccnriiics or
sinal lcss sironly wlcn manacrs ilink ilcir siock is ovcrjricco. 1lcn ilc nrm`s avcrac
josi-annonnccmcni anormal siock jricc jcrlormancc (lollowin annonnccmcni ol a slarc
jnrclasc,salc or oilcr corjoraic aciion) will c ol ilc samc sin as ilc avcrac iniiial jricc
rcaciion. 1lc nnocrrcaciion ol ovcrconnocni iraocrs io jnlic sinals is consisicni wiil a
rowin nnmcr ol sinoics ol varions corjoraic cvcnis (scc looinoic 1).
1lc cominaiion ol ovcrrcaciion io jrivaic sinals ano nnocrrcaciion io jnlic sinals
can cxjlain somc cmjirically-oscrvco iimc-scrics jaiicrns in siock jriccs. Lon-rnn nca-
iivc siock jricc aniocorrclaiions arisc simjly ccansc ilc ovcrrcaciion io ilc jrivaic sinal
ai oaic 1 mnsi cvcninally rcvcrsc as nnccriainiy rcsolvcs. Howcvcr. in a consiani-connocncc
sciiin ilcrc is an immcoiaic (sinlc-jcrioo) ovcrrcaciion jlasc ano a raonal rcvcrsal. In
sncl a sciiin ilc nnconoiiional jricc-clanc aniocorrclaiions is ncaiivc ai all las ano
lorizons. 1lns. ilc asic consiani-connocncc moocl is inconsisicni wiil slori-icrm nncon-
oiiional momcninm.
12
Howcvcr. slori-la aniocorrclaiions will c josiiivc in a sciiin wiil a smooil. mnlii-
jcrioo ovcrrcaciion jlasc. Onicomc-ocjcnocni slilis in connocncc rcsnli in cxacily sncl
a oclayco ovcrrcaciion. Accoroin io n:.h&.n |:j in jsycloloy (Lcm (190)). wlcn
cvcnis occnr ilai connrm ilc valioiiy ol an inoivional`s aciions. ilc inoivional aiirinics
ilis io lis own lil ailiiy. wlilc cvcnis ilai oisconnrm ilc aciion arc aiirinico io cxicrnal
noisc or saoiac. 1lis sncsis ilai connocncc will vary ovcr iimc ocjcnoin on wlcilcr
an inoivional`s clicls ano aciions arc connrmco y snscqncni cvcnis.
Il an invcsior makcs a iraoc asco on a jrivaic sinal. ilcn wc say ilai a laicr jnlic
sinal n]:n a iraoc il ii las ilc samc sin (ooo ncws arrivcs alicr a ny. or ao
ncws alicr a scll). Lasco on aiiriniion ilcory. wc assnmc ilai wlcn an invcsior rcccivcs
connrmin jnlic inlormaiion. lis connocncc riscs. ni oisconnrmin inlormaiion canscs
connocncc io lall only moocsily. il ai all.
18
Wlcn ilcrc arc iwo consccniivc lavoralc sinals.
ilc sccono nj-movc is rcinlorcco y incrcasco connocncc. Wlcn ilcrc arc iwo oown-movcs.
ilc sccono oown movc is rcinlorcco. 1lns. onicomc-ocjcnocni slilis in connocncc can
rin aoni josiiivc momcninm. Sncl momcninm will c rcvcrsco in ilc lon rnn as jnlic
inlormaiion arrival raonally oraws ilc jricc ack iowaro lnnoamcnials. 1lis yiclos a
lnmj-slajco imjnlsc rcsjonsc lnnciion lor a jrivaic sinals as illnsiraico in Iinrc 2. 1lis
l2
1his oulcono is sinilui lo lhul of lho fuos` noool of Sunnois (1086), in which un inslunlunoous shocl
oiivos lho slocl piico uwuy fion lho funounonlul vuluo, uno lhon lho piico only giuouully iovoils lo lho
funounonlul vuluo. 1ho suooon uppouiunco of lho piico oiioi louos lo nogulivo soiiul coiiolulion, Locuuso
lho lho hunp` oi liough` is nol snoolhoo on lho lofl.
l3
1his ulso iolulos lo lho nolion of cognilivo oissonunco, in which inoiviouuls suppioss infoinulion lhul
conicls wilh pusl choicos.

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7
Iinrc 2: Avcrac Iricc as a Innciion ol 1imc wiil Onicomc-Dcjcnocni Connocncc
1 2 3 3
Favorable Private Signal
Unfavorable Private Signal
Price
Time
Iinrc slows iwo jossilc oaic 1 jriccs. ano ilc jails lor cxjccico jricc conoiiional on ilc
oaic 1 movc. 1lc nnrc slows ilai wiil onicomc-ocjcnocni connocncc. ilcrc is a smooil.
mnliijcrioo ovcrrcaciion jlasc. ano as a rcsnli ilcrc is josiiivc nnconoiiional jricc-clanc
aniocorrclaiion ai slori lorizons.
Slori-la aniocorrclaiions arc josiiivc lor ilc imjnlsc-rcsjonsc lnnciion illnsiraico in
Iinrc 2. ccansc ilc cconomcirician calcnlaics rcinrn aniocorrclaiions wiiloni conoiiion-
in on ilc oaics ol jrivaic or jnlic inlormaiion arrival. Iairs ol rcinrns orawn lrom ilc
ovcrrcaciion jlasc (oaics 0 ilronl 2) arc josiiivcly aniocorrclaico. as arc jairs orawn
lrom ilc corrcciion jlasc (oaics 2 ilronl 3). 1lis conirinics josiiivcly io ilc cconomc-
irician`s nnconoiiional aniocorrclaiion. Iairs ol jricc clancs ilai siraoolc ilc cxircmnm
(oaics 1 ilronl 3`) arc ncaiivcly aniocorrclaico. 1lis conirinics ncaiivcly io ilc ccono-
mcirician`s nnconoiiional aniocorrclaiion. Ovcrall. ilis nnconoiiional aniocorrclaiion will
c josiiivc il ilc cxircmnm-siraoolin ncaiivc aniocorrclaiion is snmcicnily small. 1lis
will c ilc casc so lon as ilc slojcs oo noi clanc ioo oramaiically ai ilc cxircmnm.
14
In conirasi. slori-icrm rcinrns ilai arc scjaraico y loncr las arc likcly io siraoolc ilc
cxircmnm ol ilc imjnlsc-rcsjonsc lnnciion. lcaoin io ncaiivc aniocorrclaiions. 1lns. ilc
jaiicrn ol momcninm ai slori las ano rcvcrsal ai lon las ariscs nainrally lrom ilc moocl.
1lc siaiic connocncc analysis imjlics jossilc nnocrrcaciion io carnins or oilcr nnan-
cial lorccasis or annonnccmcnis. 1lc oynamic analysis wiil iasco scll-aiiriniion imjlics
a la-ocjcnocni jaiicrn. Larnins snrjriscs ai nrsi icno io incrcasc connocncc. cansin
ld
In u conlinuous-lino solling, ioluins ul sono sulcionlly shoil hoiizon will Lo posilivoly uulocoiioluloo
so long us lho inpulso-iosponso funclion is snoolh (hus u conlinuous lisl ooiivulivo)
0
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7
an samc-oircciion avcrac siock jricc ircno. Lvcninally. ilis ovcrrcaciion rcvcrscs. 1lns.
ilc analysis is consisicni wiil oil slori-icrm ircnos alicr carnins annonnccmcnis ano
rcvcrsals lollowin carnins ircnos.
A jossilc occiion io moocls ilai cxjlain jricc anomalics as markci incmcicncics is
ilai smari invcsiors slonlo c alc io jroni y iraoin aainsi ilc misjricin. Il sncl
iraoin canscs wcalil io now lrom irraiional io smari iraocrs. cvcninally ilc smari iraocrs
may oominaic jricc-sciiin. Ior scvcral rcasons. wc oo noi nno ilcsc arnmcnis io c
comjcllin. as oiscnssco ai ilc siari ol Scciion 0.
Ajari lrom iis sjccinc cmjirical imjlicaiions. a sjccial casc ol ilc ovcrconnocncc aj-
jroacl io sccnriiics jricin jromiscs io jlay a nsclnl ilcorciical rolc. 1lc limiiin casc in
wlicl iraocrs oscrvc jnrc noisc ni clicvc ilcy oscrvc a nsclnl sinal is a qnasi-raiional
moocl ol noisc-iraoin clavior. Ly qnasi-raiional. wc mcan ilai invcsiors arc raiional in
all rcsjccis ni onc. ilai ilcy arc ovcrconnocni aoni ilc qnaliiy ol ilcir jrivaic inlor-
maiion. Ly noisc-iraoin`. wc mcan iraoin asco on a ranoom varialc rcaroco as a
mcaninlnl sinal y ilc inoivional wlicl acinally coniains no nsclnl inlormaiion. Sncl a
microlonnoaiion lor noisc-iraoin clavior may c valnalc sincc noisc iraoin nnocrlics
oil a lcaoin ajjroacl io nnocrsianoin sccnriiy jricc anomalics (Slillcr (1984). Llack
(1980). Dc Lon. Sllcilcr. Snmmcrs. ano Walomann (1990a). Dc Lon. Sllcilcr. Snmmcrs.
ano Walomann (1991). Camjcll ano Iylc (1993).
1
ano ilc sianoaro moocls ol sccnriiy
markci inlormaiional cqnilirinm (Iylc (198). Grossman ano Siiliiz (1980). ano Glosicn
ano Milrom (198)).
16
1lc rclaiion ol ilc connocncc ajjroacl io ilc noisc ajjroacl is
oiscnssco lnrilcr in Scciion 0.
1lc rcmainocr ol ilc jajcr is sirncinrco as lollows. Scciion 2 ocscrics jsycloloical
cviocncc ol ovcrconnocncc ano scll-aiiriniion ias. Scciion 3 ocvclojs ilc asic moocl ol
ovcrconnocncc. Hcrc. wc ocscrics ilc cconomic sciiin. ocnnc ovcrconnocncc. Wc analyzc
ilc cqnilirinm io ocrivc imjlicaiions aoni siock jricc rcaciions io jnlic vcrsns jrivaic
ncws. slori vcrsns lon-icrm aniocorrclaiions. ano volaiiliiy. Scciion 4 cxamincs iimc-
variaiion in ovcrconnocncc. io ocrivc imjlicaiions aoni ilc sins ol slori-icrm vcrsns lon-
icrm rcinrn aniocorrclaiions. Scciion oiscnsscs ilc normaiivc ano cmjirical imjlicaiions
ol ilc moocl lor corjoraic nnancial jolicy. Scciion 0 oiscnsscs lnrilcr ilc rclaiion io cxisiin
ilcorics. Scciion conclnocs.
l5
Shilloi (1084) pioposos lhul inoiviouuls liuoo Lusoo on nislulon Lul popului noools of lho oconony;
Llucl (1086) lhul invoslois liuoo on noiso. Do Long, Shloifoi, Sunnois, uno Wulonunn (1000u) uno
Do Long, Shloifoi, Sunnois, uno Wulonunn (1001) poinl oul lhul ovoiconloonco cun unooilio noiso liuoing,
Lul oo nol oxplicilly unulyzo lho olocl of ovoiconloonco on piicos.
lo
Wung (100) shows (uno il is liuo hoio us woll) lhul whon sono liuoois uio ovoiconloonl, infoinulion-
nolivuloo liuoing cun occui wilhoul noiso liuoois.

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2 Ovorconhdonco nnd AttrIIutIon HIns
1lc moocl wc jrcscni in ilis jajcr rclics on iwo clavioral rcnlariiics: :n]nn ano
n:.h&.n h.n. In ilcir snmmary ilc microlonnoaiions ol clavioral nnancc. DcLonoi ano
1lalcr (199) siaic ilai jcrlajs ilc mosi ronsi nnoin in ilc jsycloloy ol nomcni is
ilai jcojlc arc ovcrconnocni. Lviocncc ol ovcrconnocncc las ccn lonno in scvcral con-
icxis. Lxamjlcs inclnoc jsycloloisis (Oskamj 190). jlysicians ano nnrscs (Clrisicnscn-
Szalanski ano Lnslylcao 1981. Lanmann. Dccr. ano 1lomjson 1991). cninccrs (Iioo
190). aiiorncys (Wacnaar ano Icrcn 1980). ncoiiaiors (`calc ano Lazcrman 1990). cn-
ircjrcncnrs (Coojcr. Woo. ano Dnnkclcr 1988). manacrs (Insso ano Sclocmakcr 1992).
invcsimcni ankcrs (Siacl von Holsicin 192). ano markci jrolcssionals sncl as sccnriiy an-
alysis ano cconomic lorccasicrs (Allcrs ano Lakonislok 1983. Llion. Grncr. ano Gnlickin
1984. Irooi ano Irankcl 1989. DcLonoi ano 1lalcr 1990. DcLonoi 1991).
17
Onr ilcory assnmcs ilai invcsiors vicw ilcmsclvcs as morc alc io valnc sccnriiics ilan
ilcy acinally arc. so ilai ilcy nnocrcsiimaic ilcir lorccasi crror variancc. 1lis is con-
sisicni wiil cviocncc ilai jcojlc ovcrcsiimaic ilcir own ailiiics. ano jcrccivc ilcmsclvcs
morc lavoraly ilan ilcy arc vicwco y oilcrs.
1S
Scvcral cxjcrimcnial sinoics nno ilai
inoivionals nnocrcsiimaic ilcir crror variancc in makin jrcoiciions.
19
1lc sccono asjcci ol onr ilcory is iasco scll-aiiriniion: ilc connocncc ol ilc invcsior
in onr moocl rows wlcn jnlic inlormaiion in arccmcni wiil lis inlormaiion. ni ii oocs
noi lall commcnsnraicly wlcn jnlic inlormaiion coniraoicis lis jrivaic inlormaiion. 1lc
jsycloloical cviocncc inoicaics ilai jcojlc icno io crcoii ilcmsclvcs lor jasi sncccss. ano
lamc cxicrnal laciors lor lailnrc (Iisclon 1982. Lancr ano Ioil 19. Millcr ano Ioss
19. 1aylor ano Lrown 1988). As Lancr ano Ioil (19) jni ii. Hcaos I win. iails
ii`s clancc.` Dc Lon. Sllcilcr. Snmmcrs. ano Walomann (1991) arnc ilai sncl iasco
scll-aiiriniion may c imjoriani lor sccnriiics markcis:
...ovcrconnocncc in ilc jrccision ol onc`s csiimaic is likcly io ccomc morc cx-
ircmc ovcr iimc as ilosc wlo sncccco aiirinic ilcir sncccss io ilcir own skill
ano nomcni. ... In assci markcis. ilc riclcsi inoivionals may wcll c ilosc
wlo jlacco larc cis on vcry risky amlcs ano won. 1lcir sncccss wonlo nai-
nrally icno io rcinlorcc ilcir connocncc in ilcir own lnnclcs. wlcilcr or noi
sncl connocncc is nsiinco.
Howcvcr. ilcy oo noi aiicmji io moocl ilis jroccss ol sliliin connocncc.
l7
Soo Oooun (100) foi u gooo sunnuiy of onpiiicul liloiuluio poiluining lo ovoiconloonco.
lS
Soo Gioonwulo (1080), Svonson (1081), Coopoi, Woo, uno DunlolLoig (1088), uno 1uyloi uno Liown
(1088).
l9
Soo Alpoil uno Iuilu (1082); Fischhol, Slovic, uno Lichlonsloin (1077), uno lho oiscussions of Lichl-
onsloin, Fischol, uno Ihillips (1082) uno Yulos (1000)).
8
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S Tho HnsIc ^odoI: Constnnt Conhdonco
In ilis scciion wc jrcscni a simjlc moocl in wlicl inoivionals cnoowco wiil jrivaic inlor-
maiion arc :n]nn aoni ilc qnaliiy ol ilcir sinals. Inoivionals arc qnasi-raiional`
in ilc scnsc ilai ilcy raiionally maximizc cxjccico niiliiy cxccji lor ilis sinlc misiakcn
jcrccjiion. In Scciion 4. wc ocvcloj a moocl wiil iimc-varyin connocncc.
S.1 Tho EcononIc SottIng
1lcrc arc iwo coniinnons masscs ol acnis: a sci ol iocniical risk ncniral ovcrconnocni
iraocrs (ilc inlormco. ): ano a sci ol iocniical risk avcrsc lnlly raiional iraocrs wlo lavc
cxjoncniial niiliiy (ilc nninlormco. &).
20
Lacl inoivional is cnoowco wiil a askci coniain-
in sccnriiy slarcs. ano a risklrcc nnmcrairc wlicl is a claim io onc nnii ol icrminal-jcrioo
wcalil. Wiil ilc assnmco jrclcrcnccs. ilc iniiial oisiriniion ol wcalil ano slarcs is irrcl-
cvani lor cqnilirinm jriccs. Ai cacl oaic inoivionals can iraoc ilc consnmjiion claims lor
slarcs.
1lcrc arc 4 oaics. Ai oaic 0. inoivionals cin wiil ilcir cnoowmcnis ano iocniical
jrior clicls. ano iraoc solcly lor ojiimal risk-iranslcr jnrjoscs. Ai oaic 1. `s rcccivc a
common noisy jrivaic sinal aoni nnocrlyin sccnriiy valnc ano iraoc wiil &`s.
21
Ai oaic
2. a noisy jnlic sinal arrivcs. ano lnrilcr iraoc occnrs.
22
Ai oaic 3. conclnsivc jnlic
inlormaiion arrivcs. ilc sccnriiy jays a liqnioaiin oiviocno. ano consnmjiion occnrs. All
ranoom varialcs arc inocjcnocni ano normally oisirinico.
1lc risky sccnriiy cncraics a icrminal valnc ol o. wlicl is assnmco io c normally
oisirinico wiil mcan

o ano variancc o
2
0
. Ior mosi ol ilc jajcr wc sci

o = 0 wiiloni loss
ol cncraliiy.
1lc jrivaic inlormaiion sinal rcccivco y `s ai oaic 1 is

1
= o -.
wlcrc - is normally-oisirinico noisc ilai is inocjcnocni ol o wiil variancc o
2
c
(or jrccision
2u
1ho ussunplion lhul piicos uio sol Ly u iisl nouliul sol of inoiviouuls nulos lho noool liucluLlo. Wo
conjocluio lhul sinilui olocls woulo opoiulo wilh iisl uvoision. Il is nol possiLlo lo huvo Lolh sols of
liuoois Lo iisl nouliul, Locuuso lhoy woulo ugioo lo oisugioo" uno lulo inlnilo liuoos uguinsl ouch olhoi.
2l
Sono piovious noools wilh connon piivulo signuls incluoo Giossnun uno Sliglilz (1080), Aonuli uno
Ioiooioi (1088), uno Hiishloifoi, SuLiuhnunyun, uno 1ilnun (1004).
22
1ho noool`s ussunplion lhul piivulo infoinulion piocooos puLlic infoinulion is nol voiy iosliiclivo.. Il
is ossonliul foi sovoiul of lho inpliculions lhul ul lousl sono noisy puLlic infoinulion uiiivos ufloi u piivulo
signul, Lul uooilionul puLlic infoinulion coulo uiiivo ouilioi us woll. Aooilionul puLlic signuls piocooing oi
conlonpoiunoous wilh lho piivulo signul coulo Lo incoipoiuloo wilhin lho piioi of lho cuiionl noool.
9
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7
1,o
2
c
). 1lc &`s corrccily asscss ilc crror variancc. ni `s nnocrcsiimaic ii io c o
2
C
< o
2
c
.
28
1lc oincrin clicls aoni ilc noisc variancc arc common knowlcoc io all.
Similarly. lci ilc oaic 2 jnlic sinal c

2
= o j,
wlcrc j is normally-oisirinico noisc ilai is inocjcnocni ol o ano - wiil (corrccily csii-
maico) variancc o
2
j
.
Lqnilirinm is ocnnco as lollows:
1. Ai cacl oaic. all inoivionals maximizc cxjccico niiliiy as a lnnciion ol icrminal wcalil
wiil rcsjcci io ilcir clicls.
2. Iriccs arc sci sncl ilai ilc arcaic ocmanos lor ilc risky ano nnmcrairc sccnriiics
ai cacl oaic cqnal arcaic snjjly.
3. Ai cacl oaic inoivionals can iraoc ai ilc markci jricc io mooily ilcir nnolcs ol risky
ano nnmcrairc sccnriiics.
4. Inoivionals makc occisions ai cacl oaic asco on ilcir availalc inlormaiion. inclnoin
ilc markci jricc. ano `s ovcrconnocni clicls aoni jrccision.
. Ii is common knowlcoc ilai `s clicvc wiil ccriainiy ilai ilc noisc variancc ol
1
is
o
2
C
ano ilai &`s clicvc wiil ccriainiy ii is rcaicr ilan o
2
C
.
24
23
Il is nol ciuciul lhul lho &`s coiioclly ussoss lho oiioi vuiiunco, only lhul lhoy oo nol unooioslinulo
il us nuch us lho infoinoo oo. Also, lho uninfoinoo nooo nol Lo noio iulionul lhun lho infoinoo. 1ho
gioups nuy Lo sinilui oxcopl lhul lho uninfoinoo huvo no piivulo signul lo Lo ovoiconloonl uLoul. Lvon
if il is ussunoo lhul ull inoiviouuls iocoivo piivulo signuls, il is nol ossonliul lo huvo usynnoliy Lolwoon
inoiviouuls. Mosl of lho iosulls ooiivoo in lho pupoi woulo ulso upply in u solling wilh u conlinuun of
ox unlo ioonlicul iisl uvoiso inoiviouuls who iocoivo uno uio ovoiconloonl uLoul infoinulion signuls of lho
foin

l
= 0 c c

,
whoio c

is inooponoonl ucioss inoiviouuls. Sinco u sol of oisciolo inoiviouuls will Lo unuLlo lo oisonlunglo
0 c fion c

poifoclly, ovon if lhoy unooioslinuloo lho vuiiunco only of c

, nol c, lhis woulo cuiiy ovoi lo

ovoiwoighling of 0c iolulivo lo lho piioi. Such u noool woulo Lo Liouoly sinilui lo, Lul loss liucluLlo lhun
lhul of lho nuin loxl. If lhoio is u conlinuun of inoiviouuls, piicos woulo Lo sol sololy Lusoo on 0 c, uno
inoiviouuls woulo Lo uLlo lo oisonlunglo 0 c poifoclly fion c

. Such u noool is liucluLlo uno ossonliully

oguivulonl lo lhul of lho nuin loxl. Howovoi, lo oLluin piico unonulios il ioguiios unooioslinulion of lho
vuiiunco of c, nol jusl c

.
2d
Sinco piicos uio sol Ly ovoiconloonl liuoois, il nullois lilllo whul lho &`s Loliovo, Lul lhoio nusl Lo
sono oisugioononl foi signul-Lusoo liuoing lo occui. 1ho ussunplion lhul nuinluins us nuch iulionulily
us possiLlo in lho noool suLjocl lo incluoing ovoiconloonco woulo Lo lhul lho &8 Loliovo wilh coiluinly
lhul lho noiso vuiiunco is lho liuo vuluo o
2
G
.
10
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i
c

c
o
p
y

o
f

t
h
i
s

p
a
p
e
r
,

p
l
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a
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e

v
i
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:

h
t
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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
S.2 EquIIIIrIun IrIcos nnd Trndos
Givcn ilai ilc inlormco iraocrs arc risk ncniral. jriccs ai cacl oaic saiisly
1
1
= 1
C
[o[o -[
1
2
= 1
C
[o[o -, o j[, (1)
wlcrc ilc snscriji ( ocnoics ilc laci ilai ilc cxjcciaiion ojcraior is calcnlaico asco on
ilc inlormco iraocrs` connocni clicls. 1rivially. 1
8
= o.
1lc conoiiional momcnis in (1) can c calcnlaico y sianoaro jrojcriics ol normal
varialcs (Anocrson 1984. Clajicr 2) io c
1
1
=
o
2
0
o
2
0
o
2
C
(o -)
1
2
=
o
2
0
(o
2
C
o
2
j
)
1
o
o
2
0
o
2
j
1
-
o
2
0
o
2
C
1
j, (2)
wlcrc 1 = o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
.
S.S EnpIrIcnI InpIIcntIons
In ilis snscciion. wc invcsiiaic ilc cmjirical imjlicaiions ol ilc consiani connocncc
moocl. Snscciion 3.3.1 cxamincs jricc rcaciions io jnlic ano jrivaic inlormaiion: Sn-
scciion 3.3.2 cxamincs ilc imjlicaiions lor jricc-clanc aniocorrclaiions: ano Snscciion
3.3.3 cxamincs imjlicaiions lor cvcni-sinoics.
S.S.1 OvorronctIon nnd lndorronctIon
1lc asic rcsnlis ol ilis moocl arc rclaico io ilc jricc rcaciion io jnlic ano jrivaic inlor-
maiion. Ovcrconnocncc canscs ::n.n io jrivaic inlormaiion. so ilai ilc covariancc
ciwccn ilc oaic 1 jricc clanc ano ilc oaic 2 jricc clanc. cov(1
2
1
1
, 1
1
1
0
). is
ncaiivc il invcsiors arc ovcrconnocni. Ininiiivcly. ilcrc is ovcrrcaciion in rcsjonsc io ilc
sinal o-. wlicl is jariially corrccico y ilc oaic 2 jnlic sinal. ano lnlly corrccico njon
rclcasc ol ilc oaic 3 jnlic sinal (so ilai cov(1
8
1
1
, 1
1
1
0
) < 0). 1lis jricc clanc
rcvcrsal ariscs lrom ilc coniinnin corrcciion io ilc oaic 1 ovcrrcaciion.
IroposItIon 1 1] .n: n: :n]nn, |nn :. n :&|.nj ]:n :.n .n-
]:nn.n .jnn| n: n n:nj n:.n| |j ::n .n | |nj :&n.
In conirasi. siock jriccs nnocrrcaci io inocjcnocni jnlic ncws arrival. As oiscnssco aovc.
ilc ovcrrcaciion ai oaic 1 is jariially corrccico ai oaic 2. wlcn ilc jnlic sinal is rclcasco.
11
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p
a
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e
r
,

p
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a
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e

v
i
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:

h
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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Wlcn o is rcvcalco ai oaic 3. ilc jricc will corrcci lnlly. 1lns. ilc jricc clancs ai ilc
iimc ol ano snscqncni io ilc jnlic sinal arc josiiivcly corrclaico. Iormally. cov(1
8

1
2
, 1
2
1
1
) 0 wlcn invcsiors arc ovcrconnocni (o
2
c
o
2
C
). (Ajjcnoix A jroviocs ociailco
cxjrcssions.) 1lis imjlics ilc lollowin jrojosiiion:
IroposItIon 2 1n | nnn n]nn nn| .| :n]nn .n:, | :.
:n.n nn..nn||j .nnnnn &h|. n n::.n| . ..|j ::|nn .| |n:
| :. |nnj.
In Snscciion 3.3.3. wc will scc ilai ilc assnmco inocjcnocncc ol ilc jnlic sinal ano ilc
crror in 1`s sinal - is imjoriani lor cvcni sinoy imjlicaiions. Howcvcr. in ilai scciion wc
slow ilai Irojosiiion 2`s conclnsion ol josiiivc jricc clanc aniocorrclaiion aronno jnlic
sinals cxicnos io ilc casc wlcrc ilc jnlic cvcni is rclaico io ilc misjricin ai oaic 1.
2
Lasco on ilis analysis. a ccniral ilcmc ol ilis jajcr is ilai wlcn ovcrconnocncc innn-
cnccs jriccs. | :. ::n :.n .n]:nn.n n::.n| nnn &nn::n &h|.
.n]:nn.n n::.n|.
26
1lc ovcrrcaciion io jrivaic inlormaiion occnrs ccansc invcsiors ovcr-
wcili ilcir jrivaic sinals. so ilcy arc orawn ioo lar lrom ilcir iniiial jrior clicls. Havin
oonc so. ilcy arc nnonly connocni aoni ilcir rcvisco clicls. Wlcn a noisy jnlic sinal
arrivcs. ilcy icno io corrcci iowaro irnc valncs. ni only jari way. 1lis nnocrrcaciion io
jnlic ncws cxjlains ilc cviocncc lrom many cvcni sinoics ol lon rnn siock markci nnocr-
or ovcr-jcrlormancc in ilc samc oircciion as ilc iniiial jricc rcaciion io jnlic cvcnis (scc
Snscciion 3.3.3). 1lc jaiicrn ol ovcrrcaciion-io-jrivaic-,nnocrrcaciion-io-jnlic- sinals
is joicniially icsialc y cxaminin wlcilcr. on oaics wlcn ilcrc arc no jnlic inlormaiion
rclcascs lor a nrm. iis siock jricc movcs icno io c rcvcrsco in ilc lon icrm morc ilan
jricc movcs coinciocni wiil ilc rclcasc ol jnlic inlormaiion aoni ilc nrm.
S.S.2 ^onontun, HovorsnIs, nnd VoIntIIIty
Many sinoics calcnlaic aniocorrclaiions wiiloni conoiiionin on ilc arrival ol jnlic inlor-
maiion. (1lc aniocorrclaiions oiscnssco carlicr oo noi conoiiion on ilc n|& ol ilc jnlic
25
Allhough lho piico chungos uio posilivoly uulocoiioluloo, lho ovonl lhul inoucos lhon is un::|nn
wilh lho suLsoguonl piico chungo. 1his nuy soon counloiinluilivo, Lul lho iouson is sinplo. 1ho nispiicing
hus lho suno sign us c, lho oiioi in lho piivulo signul. 1ho puLlic signul 0 j is unioluloo lo lho sign of lho
nispiicing, so u high puLlic signul is jusl us liloly lo Lo ussociuloo wilh u posilivo us u nogulivo long-iun
coiioclion. In conliusl, lho piico chungo whon lho puLlic signul is unnouncoo ioocls nol jusl lho puLlic
signul, Lul ulso lho nispiicing. 1ho noio unooipiicoo lho socuiily, lho noio posilivo on uvoiugo will Lo lho
slocl piico iouclion lo fuilhoi nows. 1hus, u fuvoiuLlo ovonl-oulo slocl piico chungo is ussociuloo wilh u
posilivo fuluio uvoiugo liono.
2o
An inloiosling unulogy is founo in lho lhooiy of Iionooigusl uno Slolo (1006). 1hoy lno lhul nunugois
will Lohuvo in lhis fushion in oiooi lo Luilo uno nuinluin iopululion.
12
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,

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n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
sinal. ni oo rcly on ilc cxisicncc ol ilc sinal ai ilc sjccinco oaic.) Ior cxamjlc. rc-
inrn aniocorrclaiions in oli-ciico sinoics sncl as Iama ano Ircncl (1988) ano 1caoccsl
ano 1iiman (1993) arc nnconoiiional. 1o calcnlaic an nnconoiiional aniocorrclaiion in ilc
moocl. consiocr an cqnivalcni cxjcrimcni wlcrc ilc cconomcirician jicks consccniivc oaics
lor jricc clancs ranoomly (oaics 1 ano 2. vcrsns oaics 2 ano 3). 1lc oaic 2 ano 3 jricc
clancs arc josiiivcly corrclaico. ni ilc oaic 1 ano 2 jricc clancs arc ncaiivcly corrc-
laico. Snjjosc ilai ilc cconomcirician is cqnally likcly io jick ciilcr jair ol consccniivc
oaics. 1lcn ilc ovcrall aniocorrclaiion is
o
4
C
o
S
0
(o
2
C
o
2
c
)
2(o
2
0
o
2
C
)[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[
2
,
wlicl is njn. nnocr ovcrconnocncc.
IroposItIon S 1] .n: n: :n]nn, :. |nnj n: &nnn..nn||j njn.|j
n&::|nn .n h| | |: nnn |nj :&n.
1lns. ilc consiani-connocncc moocl oocs noi cxjlain nnconoiiional jricc momcninm (as
oocnmcnico. lor cxamjlc. in 1caoccsl ano 1iiman (1993)). Howcvcr. ilc nnconoiiional
aniocorrclaiion will c josiiivc (consisicni wiil ilc momcninm cviocncc) il ilc lnmj or
ironl in ilc avcrac jricc jaiicrn is smooil. 1lc ncaiivc aniocovariancc ol jricc clancs
snrronnoin a smooil cxircmnm will c low in asolnic valnc (as oiscnssco in ilc iniroonc-
iion: scc Iinrc 2). 1lc moocl in Scciion 4 asco on iasco scll-aiiriniion ano onicomc-
ocjcnocni connocncc lcaos io a smooil ovcrrcaciion jlasc nj io ilc cxircmnm. consisicni
wiil slori-icrm momcninm.
1lc asic moocl also imjlics ilai ovcrconnocncc can occrcasc volaiiliiy aronno jnlic
annonnccmcnis. Ii can c calcnlaico oirccily ilai oaic 2 jricc clanc volaiiliiy var(1
2
1
1
)
can ciilcr incrcasc or occrcasc in o
2
C
. (Lxjlicii cxjrcssions lor ilc varianccs ol ilis scciion
arc coniainco in Ajjcnoix A.) Ininiiivcly. rcaicr ovcrconnocncc canscs nnocrwciliin ol
ilc jnlic sinal. wlicl icnos io rconcc oaic 2 variancc. Howcvcr. ovcrconnocncc canscs
wiocr swins ai oaic 1 away lrom lnnoamcnials. wlicl crcaic a rcaicr ncco lor corrcciivc
jricc movcs (ano variancc) ai oaic 2 (ano oaic 3). In conirasi. Oocan (199) nnos. in a
sciiin wiiloni a noisy jnlic inlormaiion arrival. ilai ovcrconnocncc incrcascs volaiiliiy.
1lis occnrs in onr moocl ai oaic 1. wlcrc ilc oaic 1 jricc volaiiliiy var(1
1
1
0
) occrcascs
wiil o
2
C
. ano ilcrclorc riscs wiil connocncc. 1lc oincrin rcsnlis on volaiiliiy sncsi ilai.
in samjlcs rokcn oown y iyjcs ol ncws cvcni. ciilcr cxccss or insnmcicni volaiiliiy may
c jossilc.
Consiocr aain an cconomcirician wlo oocs noi conoiiion on ilc occnrrcncc ol jrivaic
or jnlic ncws arrival. Hc will calcnlaic jricc clanc varianccs jlacin cqnal wcilis on
13
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,

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:
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c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
jricc clancs 1
1
1
0
. 1
2
1
1
. ano 1
8
1
2
. 1lc nnconoiiional volaiiliiy is ilcrclorc
nsi ilc ariilmciic mcan ol var(1
8
1
2
). var(1
2
1
1
). ano var(1
1
1
0
). Wlcn ilcrc is
no ovcrconnocncc. o
2
C
= o
2
c
. ilis rconccs io o
2
0
,3. 1lc cxccss volaiiliiy is ilc oincrcncc
ciwccn ilc volaiiliiy wiil ovcrconnocncc ano o
2
0
,3. 1lis is josiiivc so lon as ilcrc is
ovcrconnocncc. o
2
C
< o
2
c
.
IroposItIon J C:n]nn .n:n |n.|.j n:&nn :.n .jnn|, nn .n:n :
n:n |n.|.j n:&nn &h|. .jnn|, nnn .n:n &nnn..nn| |n.|.j.
1lns. consisicni wiil Oocan (199). ovcrconnocncc crcaics cxccss volaiiliiy. 1lis may lclj
cxjlain ilc nnoins ol Slillcr (1981) ano Slillcr (1989) ilai siock jriccs arc ioo volaiilc
rclaiivc io oiviocnos. Il invcsiors wcrc &nn:n]nn. o
2
C
o
2
c
. ilcn (scc ilc cxjrcssions
in Ajjcnoix A) ilcrc wonlo c .n&].n volaiiliiy rclaiivc io ilc raiional lcvcl. 1lns.
ii slonlo noi c jrcsnmco ilai cxccss volaiiliiy is a nainral conscqncncc ol almosi any
moocl ol imjcrlccily-raiional jricin. Iailcr. cviocncc in lavor ol cxccss volaiiliiy snjjoris
moocls ol ovcrrcaciion io inlormaiion ovcr moocls ol nnocrrcaciion.
S.S.S Evont Study InpIIcntIons
In cvcni sinoics. jnlic-ncws-arrival-oaic sccnriiy jricc movcmcnis arc inicrjrcico as rc-
sjonoin io inlormaiion rcvcalco y ilc cvcni. Many rcccni sinoics (looinoic 1) jrovioc
cviocncc ol josi-cvcni jricc ircnos. sncsiin ilai ilc markci jricc oocs noi lnlly incor-
joraic inlormaiion coniainco in ilc cvcnis.
Wc now slilily cncralizc ilc moocl lor ajjlicaiion io cvcni sinoics. Wc assnmc ilai
ilc oaic 2 sinal is no loncr jnlic. ni is insicao rcccivco :.n|j y ilc nrm`s manacr
(or oilcr inoivional sncl as an analysi). ano ilai ilis inoivional iakcs an aciion (ilc cvcni`)
wlicl is jnlicly oscrvco.
Lci 1
C
2
(
2
) c ilc valnaiion ilai wonlo c jlacco on ilc sccnriiy y an ovcrconnocni
invcsior ai oaic 2 wcrc lc io oscrvc ilc sinal
2
in aooiiion io lis sinal
1
. (Sincc wc
cxaminc cvcnis ilai lnlly rcvcal
2
. ilis is in cqnilirinm nsi ilc josi-cvcni siock jricc
1
2
.) Lci 1
1
2
(
2
) c ilc comjaralc valnaiion ilai wonlo c sci y a lnlly raiional invcsior.
1lc oaic 2 n.:..nj ilcn is nsi ilc oincrcncc 1
1
2
(
2
) 1
C
2
(
2
). 1lc nainrc ol ilc siock
jricc rcaciion io an cvcni ocjcnos criiically on wlcilcr ilc cvcni ocjcnos on ilc oaic 2
misjricin or noi. Wc ilns cin wiil ilc lollowin ocnniiion:
OohnItIon 1 n ovont . n :nnnn n:.nh| |n . . .nnnnn ] n|| :nnnn n:.nh|
.n | nn| r .h|j | .n]:nn.n .jnn|
1
nnn
2
. non-soIoctIvo ovont .
nn n |n . .nnnnn ] | nn n.:..nj 1
1
2
(
2
) 1
C
2
(
2
). soIoctIvo ovont
. nn n | &::n nnn: nnjn.&n nnn n | nn n.:..nj.
14
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,

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:
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.
c
o
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/
a
b
s
t
r
a
c
t
=
2
0
1
7
Lxamjlcs ol non-sclcciivc cvcnis arc jnlic ncws aoni ocmano lor a nrm`s jroonci
or ilc snjjly ol iis injnis. or (jcrlajs) rcvclaiion ol a rcakilronl in iis jroonciion
jroccsscs. A |. cvcni. in conirasi. coniains inlormaiion aoni ilc jricin crror ano
aoni ilc josi-cvcni jricc movcmcnis. Sojlisiicaico manacrs or analysis wlo arc noi
ovcrconnocni arc likcly io iniiiaic sclcciivc cvcnis. sncl as rcjnrclasin slarcs or makin
ny rccommcnoaiions. wlcn a nrm`s slarcs arc nnocrvalnco y ilc markci.
Lxamjlcs ol sclcciivc cvcnis arc a ncw issnc il ilc nrm may lavc nnocriakcn ilc ncw
issnc ccansc ilc manacr corrccily clicvco ilc siock io c ovcrvalnco y ilc markci. or an
analysi`s ny` rccommcnoaiion il ilc analysi corrccily clicvco ilc siock io c nnocrvalnco.
Sincc ilc markci ovcrwcilis ilc jrivaic sinal. ilc oaic 1 ano oaic 2 jricin crrors
(i.c.. ilc ocviaiions ol markci jricc lrom ilc jricc ilai wonlo oiain il invcsiors wcrc noi
ovcrconnocni) arc lincar in ilc jrivaic sinal crror -. 1lns. sclcciiviiy oils oown io wlcilcr
ilc manacr`s aciion is inocjcnocni ol -.
^on-SoIoctIvo Evonts
Sincc a non-sclcciivc cvcni is an aciion ilai is nnrclaico io ilc jricin crror ai oaic 2.
ii will noi lorccasi lninrc jricc movcmcnis. 1lis oscrvaiion can c lormalizco as lollows.
IroposItIon 1] .n: n: :n]nn, |n nn n . nn-|. .] nnn n|j .]
. . ]| |n hj .: n:nj -nnn&nnn nhn:nn| :. |nnj.
A simjlc iyjc ol non-sclcciivc cvcni is a varialc ilai is lincarly rclaico only io
2
. Sncl an
cvcni is inocjcnocni ol ilc crror icrm in ilc jrivaic sinal -. ano will noi lorccasi lninrc
jricc movcmcnis. so ilai cov(
2
, 1
8
1
2
) = 0.
27
1lc aovc oiscnssion sncsis ilai il a manacr rcjoris salcs. casl now. or carnins
wiiloni rcaro io misjricin. ilcrc will c no josi-annonnccmcni orili lollowin clancs
in ilcsc varialcs. Howcvcr. wc will slow ilai ilis conclnsion clancs il wc rclax ciilcr
onr assnmjiion ilai carnins rcjoris arc non-sclcciivc. or onr assnmjiion ilai carnins
clancs arc mcasnrco rclaiivc io jasi carnins. railcr ilan rclaiivc io carnins lorccasis.
SoIoctIvo Evonts
Many jnlic cvcnis. sncl as rcjnrclascs. sccm io c nnocriakcn y manacmcni ai lcasi
jariially in rcsjonsc io markci misjricins. 1lcsc |. jnlic cvcnis will lorccasi lninrc
jricc clancs. Ior iraciailiiy. wc consiocr sclcciivc cvcnis ilai arc lincar lnnciions ol ilc
27
1ho puLlic signul
2
is uncoiioluloo wilh fuluio piico chungos, yol us wo showoo in Iioposilion 2, lho
slocl piico :n.n lo lhis ovonl is posilivoly coiioluloo wilh lho luloi piico chungo. Inluilivoly, lho puLlic
signul is unioluloo lo lho oiioi in lho piivulo signul. So ovon lhough il is infoinulivo uLoul vuluo, il is
unioluloo lo lho nuilol piicing oiioi. 1hus, il cunnol piooicl fuluio piico chungos. 1ho nuilol piico
chungo in iosponso lo lho puLlic ovonl, in conliusl, is ioluloo lo lho piicing oiioi; on uvoiugo il ucls lo
coiiocl il, us ooos lho suLsoguonl piico chungo us woll.
1
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7
oaic 2 misjricin. so ilai. lor ilc rcmainocr ol ilis scciion. ilc icrm sclcciivc` will ajjly
io cvcnis wlicl saiisly ilis conoiiion.
Consiocr a manacr wlo oscrvcs 1
1
(ano ilcrclorc
1
) ano rcccivcs
2
ai oaic 2. 1lc
manacr can nnocriakc an cxclanc oncrin. ano will oo so il lc can oo ilc cxclanc ai
a lavoralc cqniiy jricc. In ilis sciiin. ilc sizc ol ilc oncrin will lnlly rcvcal
2
io ilc
markci. 1lns. ilc manacr will conoiiion ilc sizc ol ilc oncrin on ilc misjricin ai oaic
2. wlicl lc knows jrcciscly. sincc lc knows oil
1
ano
2
. Ii can casily c slown ilai
in ilis sciiin ilc oaic 2 jricin crror is jrojoriional io ilc cxjccico crror in ilc jrivaic
sinal:
-
A
= 1[-[1
1
,
2
[,
wlcrc ilc cxjcciaiion is aain iakcn wiil rcsjcci io raiional clicls.
Wlcn -
A
< 0. ilc manacr clicvcs ilc markci las nnocrvalnco ilc nrm. so ilc nrm
can jroni` y oncrin oci lor cqniiy. 1lc morc nnocrvalnco ilc nrm. ilc rcaicr ilc sizc
ol ilc oncrin. Il -
A
0. an cqniiy-lor-oci swaj wonlo c jrclcrrco insicao. Similarly. wc
conlo inicrjrci ilc cvcni as ciilcr a rcjnrclasc or ncw issnc ol cqniiy. wiil ilc sizc ol ilc
cqniiy salc cin a monoionically incrcasin lnnciion ol -
A
.
2S
1lc covariancc cov(1
8
1
2
, -
A
)
ocscrics ilc rclaiion ciwccn ilc corjoraic cvcni ano ilc josi-cvcni jricc clanc. 1lis
covariancc is njn. so lon as inoivionals arc ovcrconnocni (o
2
C
< o
2
c
). 1lns. a ooo ncws
cvcni sncl as a rcjnrclasc (inoicaiin -
A
< 0) is associaico wiil a josiiivc cvcni oaic jricc
clanc ano a josiiivc josi-annonnccmcni anormal jricc clanc.
IroposItIon 6 1] .n: n: :n]nn, |n |. n |n n: njnjn .n |n
| | nn: &nn::.n {::.n) hnn n | nn 1 nn:| :. nnn | nn
.jnn| .|| h n.nn .| .. {njn.) n-nn nhn:nn| :. |nnj nnn .| |
n n:nj h ]||n hj .. {njn.) -nnn&nnn nhn:nn| :. |nnj.
Irojosiiion 0 sonnos similar io Irojosiiion 2. ni ilc conicni oincrs. In Irojosiiion 2
jricc clancs wcrc corrclaico cvcn ilonl ilc cvcni ol jnlic ncws arrival was nncorrclaico
wiil laicr jricc clancs (scc Irojosiiion ). In Irojosiiion 0. ilc cvcni iiscll is corrclaico
wiil lninrc jricc clancs (scc also looinoic 2).
1lis analysis imjlics lon rnn nnocrjcrlormancc lollowin IIOs as wcll as scasonco
issncs. nnocr ilc jrcmisc ilai ilc annonnccmcni ol an IIO is a ao ncws cvcni` lor in-
vcsiors. Sincc IIO nrms arc jrivaic jrior io ilc cvcni. wc cannoi mcasnrc ilc cvcni oaic
siock jricc rcaciion cmjirically. Howcvcr. ivcn ilc consisicni cncral nnoin ol ncaiivc
2S
Wo uio ussuning hoio lhul lho nunugoi is nuxinizing lho inliinsic vuluo of lho lin. 1ho nunugoi`s
uclions coulo ulso Lo u nuch noio conpliculoo funclion of Lolh lho nispiicing uno lho lnul slocl piico,
ooponoing on lho nunugoi`s inconlivo funclion.
10
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1
7
siock jricc rcaciions io ilc issnancc ol cqniiy ano cqniiy-likc sccnriiics. ano ilc cviocncc
ol inlcrior josi-IIO acconniin jcrlormancc (1ain ano Iini (1994). Mikkclson. Iaricl. ano
Slal (199). 1col. Won. ano Iao (1990)). ii sccms likcly ilai ilai IIO annonnccmcni is
inocco on avcrac ao ncws. Lnocr ilis inicrjrciaiion. ilc cviocncc ilai IIOs oo inicrna-
iionally cxliii lon-rnn avcrac nnocrjcrlormancc (cvcn mcasnrco lrom ilc oncrin jricc)
lor scvcral ycars alicr ilc issnc
29
is consisicni wiil ilc moocl.
Wc lavc inicrjrcico ilc moocl in icrms ol nrms nyin or scllin slarcs io cxjloii
misjricin. An alicrnaiivc inicrjrciaiion is ilai a manacr wiil lavoralc inlormaiion
(-
A
< 0) wonlo likc io sinal ooo ncws io ilc markci. ano clooscs an aciion (sncl as a
rcjnrclasc. oiviocno. oci lor cqniiy swaj. or siock sjlii) io rcvcal lis inlormaiion. \arions
sinalin moocls cinnin wiil Ioss (19) lavc slown ilai ccriain nnancial sinals may
c morc cosily lor a nrm or manacr io iakc il ilc manacr las aovcrsc inlormaiion ilan
il lc las lavoralc inlormaiion. Wiil a coniinnons sinal. ilis iyjically lcaos io a lnlly
rcvcalin cqnilirinm. consisicni wiil onr assnmjiion ilai -
A
is rcvcalco io ilc markci ai
ilc cvcni oaic.
Sincc ilc cvcni` in onr moocl is coniinnons. annonnccmcnis ol nrm jcrlormancc mca-
snrcs sncl as salcs. casl now or carnins can c inicrjrcico as corjoraic cvcnis. Wlcilcr
ilcy arc sclcciivc ocjcnos on ilc assnmco clavior ol manacrs ano ilc jrccisc way ilai
clancs in ilcsc varialcs arc mcasnrco.
1lc carnins cvcni iiscll. or a manacrial carnins lorccasi. may c sclcciivc il manacrs
rcjori carnins (or lorccasis) siraicically. 1lis will occnr il manacrs rcjori morc lavoraly
wlcn ilcy clicvc ilai ilc markci is nnocrvalnin ilcir nrm.
80
1lcrc may c sciiins wlcrc
manacrs lavc sncl an inccniivc io manac carnins io corrcci markci misjricin. Snjjosc
manacrs cncni il ilc markci jcrccivcs ilc nrm lavoraly in ilc slori rnn. ni incnr a
jcnaliy lor a rcjori ilai jrovcs in ilc lon-rnn io c ovcr-arcssivc. Il manacrs ocrivc
risin marinal oisniiliiy lrom a lowcr siock jricc (owin io lcar ol iakcovcr. oismissal.
or nnwanico aiicniion lrom aciivisi invcsiors). ilcn ilc nci cncni lrom issnin a morc
lavoralc rcjori may incrcasc wlcn ilc siock is morc nnocrvalnco. In sncl a sciiin.
clancs in carnins or manacrial lorccasis will c sclcciivc cvcnis. so ilcrc will c josiiivc
josi-annonnccmcni anormal jricc clancs alicr an carnins incrcasc ano ncaiivc jricc
clancs alicr an carnins occrcasc.
A oincrcni way in wlicl clancs in carnins or oilcr jcrlormancc varialcs can c
sclcciivc cvcnis is il ilc clanc in ilc varialc is mcasnrco rclaiivc io an analysi lorccasi
29
Soo Iilloi (1001), Loughiun, Iilloi, uno Iyogvisl (1004).
3u
In gonoiul, nunugois huvo sono oisciolion ovoi ouinings lhiough lho uso of uccounling uojuslnonls
(ucciuuls), oi Ly nunipululing ucluul cush ows.
1
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=
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1
7
cnclmark. Il ilc analysi`s lorccasi rclcasco ai oaic 1 rcnccis ilc samc jrivaic sinal
nsco y ilc inlormco io sci jriccs. ilcn ilis cnclmark will c rclaico io ilc markci
misvalnaiion. 1lc oincrcncc ciwccn acinal carnins rcjorico ai oaic 2 ano ilc lorccasi
maoc ai oaic 1 will ilcrclorc c ncaiivcly corrclaico wiil ilc misjricin. ano ilcrclorc
josiiivcly corrclaico wiil josi-cvcni jricc clancs.
81
1o lormalizc ilcsc iocas. snjjosc nrsi ilai insicao ol rcjoriin or lorccasiin asco on

2
irnillnlly. manacrs rcjori carnins ol
A
2
=
2
:-
A
. wlcrc : 0 is a consiani. In oilcr
woros. ilc manacr iascs ilc rcjori or lorccasi njwaros (oownwaros) lor an nnocrvalnco
(ovcrvalnco) siock. Ii lollows ilai cov(1
8
1
2
,
A
2
) = :cov(1
8
1
2
, -
A
) 0. so lilcr
carnins arc associaico wiil rcaicr josi-annonnccmcni-oaic jricc clancs.
`cxi. io locns on ilc cloicc ol ilc oaic 1 cnclmark. assnmc ilai analysis ai oaic 1
lorccasi carnins asco on ilc jrivaic sinal o -.
82
1lc rcsnliin snrjrisc jrovioco y
ilc jnlic sinal (carnins) rclaiivc io ilc lorccasi. . = o j 1[o j[o -[. is ilcrclorc
josiiivcly corrclaico wiil ilc lninrc jricc clanc 1
8
1
2
(scc Ajjcnoix A). Ininiiivcly. ilc
lilcr ilc jnlic sinal rclaiivc io cxjcciaiions. ilc lilcr is ilc jnlic sinal rclaiivc io
ilc jrivaic sinal. so ilc rcaicr ilc oaic 1 nnocrvalnaiion. 1lis imjlics a lilcr cxjccico
lninrc jricc clanc.
88
IroposItIon 7 1] .|::
1. `nnnj: : nnn|j :: : ]:n |.j|: {|:) n:n.nj |n |j :. |
]:n h &nn:n|&n {&nn:n|&n) ].]n| |j, .] |j ::
A
2
:n|: |nn
2
], :
. n:n.nj &::. n: nn&:n :|n. n:n.nj ]:n |n .n::n | :.-
n .jnn|, |n
.. {njn.) n:n.nj nnn&nnn : ]:n .|| n n:nj h ]||n hj -
.. {njn.) -nnn&nnn nhn:nn| :. |nnj.
1lns. ilc analysis is consisicni wiil cviocncc ol nnocrrcaciion` ol siock jriccs io ac-
conniin jcrlormancc rclaiivc io lorccasis ciico in ilc iniroonciion (Lcrnaro ano 1lomas
3l
A sinilui conclusion upplios if wo fuilhoi ussuno lhul unulysls shuio lho ovoiconloonl Loliofs of lho
infoinoo. Llsowhoio wo uio inloipioling unulysl Luy` ioconnonoulions us soloclivo ovonls lhul ucl lo
:: nispiicing. 1hoso lwo inloipiolulions will Lo consislonl so long us (1) unulysls uio ovoiconloonl,
Lul nol us ovoiconloonl us lho iosl of lho nuilol; oi (2) sono Lul nol ull unulysls uio ovoiconloonl.
32
Wo oo nol ioguiio lhul lho unulysls Lo ovoiconloonl, only lhul lhoy possoss u signul coiioluloo wilh
lho infoinoo signul. Howovoi, lho ovioonco iopoiloo Ly ALuiLunoll uno Loinuio (1002) of posilivo soiiul
coiiolulion in foiocusl oiiois is consislonl wilh unulysls` shuiing lho Liusos of lho infoinoo.
33
Il is ousy lo show lhul lho posilivo coiiolulion Lolwoon lho suipiiso uno lho fuluio piico chungo will
ulso oLluin if (1) lho unulysl iocoivos u noisy voision of lho piivulo signul, oi (2) lho unulysl`s shuios lho
Lius of lho infoinoo (..., ovoioslinulos lho piocision of lho infoinoo).
18
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=
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1
7
1989). 1lis occnrs ccansc mcasnrin jcrlormancc rclaiivc io lorccasi makcs ilc cvcni
sclcciivc. 1lns. josi-carnins orili slonlo c larcr wlcn carnins snrjriscs arc mcasnrco
rclaiivc io lorccasi ilan wlcn ilcy arc mcasnrco rclaiivc io jasi carnins.
1lc moocl`s cvcni sinoy jrcoiciions also ajjly io cvcnis nnocriakcn y onisiocrs wlo
lavc inlormaiion aoni ilc nrm. An cxamjlc is an analysi`s rccommcnoaiion io ny or scll
slarcs ol ilc nrm. 1lns. ilc analysis is consisicni wiil cviocncc on analysi ny` ano scll`
rccommcnoaiions oiscnssco in ilc iniroonciion. On ilc oilcr lano. ilc analysis imjlics
ilai ilcrc slonlo c no orili` lollowin non-sclcciivc cvcnis. Ior cxamjlc. rcnlaiory slilis
ilai ancci siock jriccs slonlo noi lcao io snscqncni anormal jcrlormancc.
Onc conlo aoo lnrilcr rcalisiic clcmcnis io ilis moocl. sncl as ilc jossiiliiy ilai
no cvcni occnrs. or a mnliijcrioo occision ol wlcn io iimc ilc cvcni. Howcvcr. ilc asic
ininiiion wonlo siill lolo ilai il manacrs iakc aovaniac ol misjricin. ilc cvcni-oaic siock
jricc rcaciion will only jarily rcvcrsc ilc markci`s jricin crror (ccansc ol ovcrconnocncc).
so ilc avcrac josi-annonnccmcni jricc clanc will lavc ilc samc sin as ilc iniiial rcaciion.
1lc moocl imjlics ilai misjricin can c mcasnrco noisily y lnnoamcnial,jricc raiios
sncl as ook,markci. oiviocno yiclo. or carnins,jricc raiios. Il ilc lnnoamcnial in ilc nn-
mcraior is rclaiivcly consiani. ilan a markci ovcrrcaciion in ilc oircciion ol nnocrvalnaiion
will incrcasc ilcsc raiios. ano an ovcrrcaciion in ilc oircciion ol ovcrvalnaiion will occrcasc
ilcsc raiios. 1lc mcasnrcs arc imjcrlcci io ilc cxicni ilai ilcrc is noisc in ilc nnmcraior
varialcs (lor lnllcr oiscnssion. scc Danicl. Hirsllcilcr. ano Snralmanyam (199)). 1lc
ook,markci raiio. lor cxamjlc. can c vicwco as an cmjirical ajjroximaiion ol ilc qnan-
iiiy

o1
1
ol ilc moocl. In ilc moocl lcrc josiiivc sclcciivc cvcnis (sncl as rcjnrclasc) arc
nnocriakcn in rcsjonsc io markci nnocrvalnaiion. ano ncaiivcly sclcciivc cvcnis (sncl as
ncw issncs) in rcsjonsc io ovcrvalnaiion. 1lns. ilc cxjccico sizc ol a sclcciivc cvcni slonlo
c rclaico io ilc sizc ol ilc misvalnaiion. Inrilcrmorc. ilc jroailiiy ol a josiiivc cvcni
occnrrin is incrcasin in ilc ocrcc ol nnocrvalnaiion. Ii lollows ilai:
IroposItIon S 1. J| rn .. ] n .. {njn.) |. n . .n:n.nj
{n:n.nj) .n | ]:n` ]&nnnnnn|:. :n. {&| n h|nn:|).
. J| :hnh.|.j ] n .. {njn.) |. n &::.nj . .n:n.nj {n:n-
.nj) .n | ]:n` ]&nnnnnn|:. :n..
1lns. ilc analysis jrcoicis rcjnrclascs ano oilcr josiiivc cvcnis will icno io occnr wlcn
markci. inonsiry. or nrm ook,markci raiios arc lil. ano cqniiy issnancc ano oilcr nc-
aiivc sclcciivc cvcnis will icno io occnr wlcn jricc-scalco raiios arc low. 1lis is consisicni
19
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=
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1
7
wiil ilc nnoin ol Iaano. Ianciia. ano Zinalcs (1990) ilai ilc jroailiiy ol an IIO is
josiiivcly rclaico io ilc markci,ook raiio in ilc comjany`s inonsirial scciors.
1lc analysis lnrilcr imjlics ilai ciicr jrc-cvcni jricc jcrlormancc slonlo c associaico
wiil worsc josi-cvcni jcrlormancc (ciilcr inclnoin or cxclnoin ilc cvcni oaic). 1lis is
ccansc misjricin ariscs lrom ovcrrcaciion io jrivaic inlormaiion. ano nrms arc sclcciin
cvcnis asco on misjricin. 1lns. jrior jcrlormancc mcasnrcs ilc cxicni ol ilc misjricin.
Iormally. ilis lollows ccansc cov(1
8
1
2
, 1
1
1
0
) < 0 ano cov(1
8
1
1
, 1
1
1
0
) < 0.
IroposItIon 9 1: :-n | :. :]:nnn . n n:nj n.nn .| :
-n :]:nnn {.|: .n|&n.nj : r|&n.nj | n nn).
1lis is joicniially icsialc on varions corjoraic cvcnis. In ilc conicxi ol siock sjliis.
Ikcncrry. Iankinc. ano Siicc (1990) rcjori ilai josi-sjlii jcrlormancc lor iwo-lor-onc
sjliis (cxclnoin ilc sjlii monil) is ncaiivcly rclaico io jrc-sjlii jcrlormancc in ilcir
samjlc.
1lis analysis also imjlics ilai il connocncc is ajjroximaicly consiani across iimc
ano nrms. ilcn ilc cvcni oaic jricc clancs slonlo c josiiivcly corrclaico wiil josi-
annonnccmcni orili. 1lis is nsi nnocrrcaciion. ano lollows nnocr ilc conoiiions ol Irojo-
siiion 2. Irojosiiion 2 was asco on conoiiionin on a non-sclcciivc ncws cvcni. namcly.
ilc arrival ol
2
. Lvcn ilonl
2
is jrivaic inlormaiion lcrc. ilc rcsnli is ilc samc ccansc

2
is lnlly rcvcalco y ilc corjoraic aciion. so ilai 1
2
is iocniical in all siaics io wlai ii
wonlo c il
2
wcrc maoc jnlic oirccily . 1lns. cov(1
8
1
2
, 1
2
1
1
) is ilc samc in oil
cascs.
IroposItIon 10 1] n]nn . nnn n: .n nnn ]:n, |n | n nn :.
|nnj .|| h ..|j ::|nn .| -nnn&nnn n:.].
Howcvcr. cross-scciional oincrcnccs in connocncc across samjlc nrms conlo rcvcrsc ilis
imjlicaiion. ccansc lilcr ovcrconnocncc will icno io rconcc in asolnic maniinoc ilc
cvcni-oaic jricc clanc. ano incrcasc ilc josi-cvcni jricc clanc. 1lcsc cnccis can in
jrincijlc c oiscnianlco nsin a jroxy lor invcsiors` connocncc aoni ilc nrm sncl as ilc
ook,markci raiio.
1lc moocl aovc. wlicl is asco on siaiic connocncc. oocs noi cxjlain ilc ncaiivc as-
sociaiion ciwccn jasi lon-icrm acconniin jcrlormancc (salcs ano casl-now rowil) ano
jricc clancs oocnmcnico y Lakonislok. Sllcilcr. ano \islny (1994). Howcvcr. ilc oy-
namic moocl asco on iimc-varyin connocncc owin io iasco scll-aiiriniion is consisicni
wiil oil slori-icrm orili` ano lon-icrm rcvcrsals. as oiscnssco in ilc ncxi Scciion.
84
3d
Wo show in Soclion 4 lhul Liusoo solf-ulliiLulion louos lo u noio conplox iolulion Lolwoon puLlic
20
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J Outcono-Oopondont Conhdonco
1lc imjlicaiions ocscrico so lar wcrc asco on a nxco lcvcl ol connocncc y inlormco
iraocrs. Howcvcr. jsycloloical ilcory ano cviocncc sncsi ilai connocncc varics ovcr
iimc ocjcnoin on jasi aciions ano onicomcs (scc Scciion 2). 1lis cviocncc sncsis ilai
cvcnis ilai connrm an inoivional`s clicls ano aciions io oosi connocncc ioo mncl. ano
cvcnis ilai oisconnrm io wcakcn connocncc ioo liiilc.
In ilc consiani-connocncc moocl ol Scciion 3. ilc nnconoiiional slori-la aniocorrcla-
iion calcnlaico y an cconomcirician wlo oocs noi know ilc oaic ol inlormaiion arrival
was ncaiivc. As illnsiraico in Iinrc 1. ilis arosc ccansc ol ilc siron avcrac rcvcrsal
lor jricc clancs siraoolin ilc oaic 1 cxircmnm ol ilc imjnlsc rcsjonsc lnnciion. Wiil
onicomc-ocjcnocni connocncc. wc will slow ilai ilc oaic 1 avcrac ovcrrcaciion coniinncs
ai oaic 2. so ilai ilc avcrac rcvcrsal ai ilc oaic-2 cxircmnm ol ilc imjnlsc rcsjonsc
lnnciion can c smooil. as illnsiraico in Iinrc 2. 1lis lcaos io an avcrac jaiicrn ol
coniinnaiion oil lor ilc jair ol jricc movcs lcaoin nj io ilc cxircmnm. ano ilosc lollow-
in ilc cxircmnm. As arnco in ilc iniroonciion. sncl a jaiicrn is consisicni wiil oil
slori-rnn momcninm ano lon-icrm rcvcrsal. Similarly. ilc onicomc-ocjcnocni analysis
can cxjlain oil slori-rnn coniinnaiion in siock jricc rcsjonscs io nnancial oisclosnrcs.
ano lon-rnn rcvcrsal ol ilcsc rcsjonscs.
J.1 HInsod SoIf-AttrIIutIon nnd AutocorroIntIons
Consiocr an inlormco inoivional wlo iniiially is noi ovcrconnocni. ano wlo nys or sclls a
sccnriiy asco on lis jrivaic inlormaiion. A jnlic sinal n]:n lis iraoc il ilcy lavc
ilc samc sin (ny ano a josiiivc sinal. or scll ano ncaiivc sinal). Assnmc ilai
il ilc laicr jnlic sinal connrms lis iraoc. ilc inoivional ccomcs morc connocni. ano il
ii oisconnrms lis connocncc occrcascs y liiilc or rcmains consiani. 1lcn wlcn ilcrc arc
iwo consccniivc jricc incrcascs. ilc sccono nj-movc is rcinlorcco y incrcasco connocncc.
wlicl inicnsincs ovcrrcaciion. Similarly. ilcrc will c a corrcsjonoin rcinlorccmcni ol
ilc sccono oown movc wlcn ilcrc arc iwo oown-movcs (ocjcnoin on ilc lcasiiliiy ol
slori salcs). Loil ilc njsioc cncci ano ilc oownsioc conirinic io josiiivc aniocorrclaiion
(jossily wcakcnco or climinaico y slori salcs rcsiriciions). 1lcrc is an ojjosin cncci
ronli aoni wlcn ooo ncws lollows ao or vicc vcrsa. Ly assnmjiion ilis ojjosin
cncci is rclaiivcly wcak. 1lns. ovcrconnocncc can. nnocr ajjrojriaic jaramcicr rcsiriciions.
inicnsily ovcrrcaciion ano rin aoni josiiivc aniocorrclaiion in siock jriccs onrin ilc
unnouncononls uno fuluio piico chungos lhul is consislonl wilh ovioonco Lolh of oiifl ufloi shoil-loin
ouinings chungos uno iovoisuls ufloi long-loin ouinings chungos.
21
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iniiial ovcrrcaciion jlasc.
1lis joini is oisiinci lrom ilc corrcciion-jlasc josiiivc aniocorrclaiion slown in Sn-
scciion 3.3.1. Sncl corrcciion-jlasc nnocrrcaciion oiains lcrc as wcll. Iniiial ovcrrcaciion
is rcvcrsco in ilc lon rnn as jnlic inlormaiion arrival raonally oraws ilc jricc ack
iowaro lnnoamcnials. 1lis yiclos a lnmj-slajco jaiicrn lor cnmnlaiivc anormal jricc
clancs alicr a lavoralc jrivaic sinal. ano a L-slajco jaiicrn alicr an nnlavoralc jrivaic
sinal (scc Iinrc 2).
Wc jrcscni iwo moocls wiil oynamic connocncc. 1lc moocl jrcscnico in 4.2 is iracialc
cnonl io c analyiically solvco. ni is somcwlai siylizco. 1lc moocl jrcscnico in Sn-
scciion 4.3 allows ns io ocvcloj morc comjlcx imjlicaiions. ni can only c solvco nsin
simnlaiion mciloos.
J.2 Tho SInpIo ^odoI vIth Outcono Oopondont Conhdonco
Wc rciain ilc assnmjiions ol ilc asic moocl. wiil ilc lollowin mooincaiions. Wc siill
allow lor. ni no loncr rcqnirc. iniiial ovcrconnocncc. so o
2
C
_ o
2
c
. Ior iraciailiiy. ilc
jnlic sinal is now oiscrcic. wiil
2
= 1, 1 rclcasco ai oaic 2. Wc assnmc ilai ilc
jrccision asscssco y ilc invcsiors ai oaic 2 aoni ilcir carlicr jrivaic sinal ocjcnos on
ilc rcalizaiion ol ilc jnlic sinal in ilc lollowin way. Il
sin(o -) = sin(
2
),
connocncc incrcascs. so ilc jcrccivco noisc variancc occrcascs io o
2
C
/. wlcrc 0 < / < o
2
C
.
Il
sin(o -) ,= sin(
2
),
connocncc rcmains consiani. so ilc jcrccivco noisc variancc rcmains ai o
2
C
.
8
1lc jroailiiy ol rcccivin a jnlic sinal 1 is ocnoico y j. Ior a lil valnc io c
a lavoralc inoicaior ol valnc. j mnsi icno io incrcasc wiil o. Howcvcr. lor simjliciiy wc
iakc ilc limiiin casc wlcrc ilc sinal is virinally jnrc noisc. so ilai j is a consiani.
86
Givcn normaliiy ol all ranoom varialcs. ilc oaic 1 jricc is
1
1
= 1
C
[o[o -[ =
o
2
0
o
2
0
o
2
C
(o -). (3)
1lc oaic 0 jricc is ilc jrior mcan ol zcro. Il sin(o -) ,= sin(
2
), ilcn connocncc is
consiani. Sincc ilc jnlic sinal is virinally nninlormaiivc. ilc jricc (virinally) oocs noi
35
Moio gonoiully, poicoivoo noiso vuiiunco woulo iiso, Lul nol us nuch us poicoivoo noiso vuiiunco oo-
ciousos whon lho puLlic signul conlins lho piivulo signul. 1ho iosulls woulo Lo sinilui.
3o
Allowing j lo vuiy wilh 0 cioulos inliucluLlo non-noinulilios. Apponoix L piovioos u oisciolo noool
which ooiivos sinilui iosulls using un infoinulivo puLlic signul.
22
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movc ai oaic 2. Howcvcr. il sin(o -) = sin(
2
). ilcn ilc ncw jricc is calcnlaico nsin
ilc ncw lcvcl ol ilc asscssco variancc ol -. 1lis jricc. ocnoico y 1
2C
. is
1
2C
=
o
2
0
o
2
0
o
2
C
/
(o -).
J.2.1 EnpIrIcnI InpIIcntIons of tho SInpIo ^odoI
Lxjlicii calcnlaiions ano cxjrcssions lor covarianccs lor ilis snscciion arc in Ajjcnoix C.
Ii can casily c slown ilai
cov(1
2
1
1
, 1
1
1
0
) 0.
1lns. ilc moocl slows ilai slori-icrm momcninm can ajjly onrin ilc ovcrrcaciion jlasc.
noi nsi ilc corrcciion jlasc. As a rcsnli.
cov(1
8
1
1
, 1
1
1
0
) < 0
cov(1
8
1
2
, 1
2
1
1
) < 0,
ccansc ilc oaics 1 ano 2 ovcrrcaciions mnsi c rcvcrsco in ilc lon-icrm.
IroposItIon 11 1] .n: n]nn n:. n n ]&n.n ] &n .nj h.nn
|]-n:.h&.n, |n :. nn r|.h. |:-:&n nnn&n n n :&| ] n.n&.nj :-
:n.n.
Ii las ccn common in casnal nsac io cqnaic josiiivc aniocorrclaiions wiil nnocrrcaciion.
ano ncaiivc aniocorrclaiions wiil ovcrrcaciion. 1lis corrcsjonocncc is valio in somc sci-
iins. Howcvcr. lnnoamcnially. ilcsc icrms ocscric wlcilcr jriccs movc ioo mncl or ioo
liiilc in rcsjonsc io inlormaiion. In ilc cnrrcni moocl jriccs ircno njwaro (or oownwaro)
across iwo oaics as a rcsnli ol coniinnin ::n.n io ilc oaic 1 jrivaic sinal. 1lc oaic
2 jnlic sinal on avcrac lcaos io lnrilcr ovcrrcaciion in ilc samc oircciion. 1lns. wlilc
ncaiivc aniocorrclaiions arc a rcsnli ol ovcrrcaciion in onr moocl. josiiivc aniocorrclaiions
can rcsnli lrom ciilcr nnocrrcaciion or ovcrrcaciion.
Ininiiivcly. lnrilcr oaics ol noisy jnlic inlormaiion arrival slonlo cvcninally cansc ilc
misjricin io c corrccico (so lon as connocncc oocs noi cxjlooc innniicly). 1lis jroccss
lcaos io momcninm onrin ilc corrcciion jlasc. nsi as in ilc asic moocl ol Scciion 3.
1lns. ilcrc is josiiivc slori-icrm aniocorrclaiion oil in ilc ovcrrcaciion jlasc ano ilc
corrcciion jlasc.
Snjjosc wc aoo an cxira jnlic inlormaiion arrival oaic 3

ciwccn oaic 2 ano 3. io

slow ilai il ilc arrival ol jnlic inlormaiion is raonal. ilcn slori-icrm momcninm cnccis
23
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oominaic. Il oaic 2 is vicwco as ilc avcrac lnmj` or ironl` (scc Iinrc 2). ilc only
ncaiivc sinlc-la aniocorrclaiion is ilai wlicl siraoolcs ilc cxircmnm. ano all lon-
la (sinlc-jcrioo-jricc clancs. la rcaicr ilan onc) aniocorrclaiions arc ncaiivc. 1lc
asolnic valnc ol ilc ncaiivc sinlc-la siraoolin aniocorrclaiion ajjroaclcs zcro as ilc
jnlic sinal ccomcs ariirarily noisy. 1lns. in an cvcni-nnconoiiional samjlc. slori-icrm
momcninm will c oscrvco (josiiivc aniocorrclaiion) ano lon-icrm rcvcrsal (ncaiivc
aniocorrclaiion).
1o slow ilis. lci ns aoo a oaic 3

ciwccn oaics 2 ano 3. wlcrc a jnlic sinal o j is

rclcasco. Ior simjliciiy. wc assnmc ilai ovcrconnocncc is noi anccico y ilc rclcasc ol ilc
sccono jnlic sinal. As in Scciion 3. j is a zcro mcan. normally oisirinico varialc wiil
variancc o
2
j
. ano is inocjcnocni ol all oilcr ranoom varialcs. 1lc jricc ai oaic 3

wlcn
ovcrconnocncc is noi rcvisco ai oaic 2 is ivcn y (2). Wlcn ovcrconnocncc is rcvisco ai
oaic 2. ilc jricc ai oaic 3

. ocnoico y 1
8

C
is ivcn y ilc samc cxjrcssion as (2). cxccji
ilai o
2
C
is rcjlacco y o
2
C
/: i.c..
1
8

C
=
o
2
0
(o
2
C
/ o
2
j
)
1
o
o
2
0
o
2
j
1
-
o
2
0
(o
2
C
/)
1
j,
wlcrc 1 = o
2
0
(o
2
C
/ o
2
j
) (o
2
C
/)o
2
j
.
Ii is casy io slow ilai ilc rcmainin sinlc-jcrioo-jricc clanc aniocorrclaiions arc
cov(1
8
1

8
, 1
2
1
1
) < 0
cov(1
8
1

8
, 1
1
1
0
) < 0
cov(1

8
1
2
, 1
1
1
0
) < 0
cov(1
8
1
8
, 1
8
1
2
) 0
cov(1
8
1
2
, 1
2
1
1
) < 0.
Daic 2 is ilc cxircmnm (ilc lnmj` or ironl` oaic alicr wlicl ilc avcrac corrcciion
cins). Ly (10) ano ilc aovc. ilc sinlc-jcrioo-jricc clanc sinlc-la aniocorrclaiions
ilai lall cniircly wiilin ciilcr ilc ovcrrcaciion jlasc or wiilin ilc corrcciion jlasc arc
josiiivc [cov(1
2
1
1
, 1
1
1
0
) ano cov(1
8
1
8
, 1
8
1
2
)[. 1lc only ncaiivc sinlc-jcrioo-
jricc clanc sinlc-la aniocorrclaiion ii ilc onc ilai siraoolcs ilc cxircmnm cov(1
8

1
2
, 1
2
1
1
). Incrcasin ilc la lorccs ilc aniocorrclaiions io siraoolc ilc cxircmnm. Wc scc
ilai all ilc cxircmnm-siraoolin sinlc-jcrioo-jricc clanc aniocorrclaiions arc ncaiivc.
(Movin onisioc ilc lormal moocl io a sciiin wlcrc iimc is snoivioco nncly. rcinrns ai
loncr las will siill c morc likcly io siraoolc ilc jcak or ironl. ano ilcrclorc icno io c
ncaiivcly aniocorrclaico.) 1lns. ilc analysis jrcoicis ilai slori-la aniocorrclaiions will
24
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7
c josiiivc. ano lon-la aniocorrclaiions will c ncaiivc. 1lcrc is momcninm onrin ilc
ovcrrcaciion. rcvcrsal ai ilc lnmj or ironl. ano momcninm onrin ilc corrcciion.
87
Lnocr ajjrojriaic jaramcicr assnmjiions. ilc ncaiivc sinlc-la aniocorrclaiion snr-
ronnoin ilc jcak or ironl will c ariirarily closc io zcro. 1lis will occnr il ciilcr ilc
cxira ovcrrcaciion or ilc siari ol ilc corrcciion is wcak. 1lc cxira ovcrrcaciion is small il
connocncc is oosico only slilily (/ 0 small) wlcn an invcsior`s iraoc is connrmco y
jnlic ncws.
8S
1lc iniiial corrcciion is slili il ilc lnrilcr noisy jnlic sinal is noi vcry
inlormaiivc (o
2
j
larc). Wlcn jaramcicr valncs arc sncl ilai ilis siraoolin aniocorrclaiion
is noi ioo larc. ii will c oniwcilco y ilc josiiivc aniocorrclaiions onrin ilc lcari ol ilc
ovcrrcaciion jlasc or ilc lcari ol ilc corrcciion jlasc. (Scc ilc calcnlaiions in Ajjcnoix
C.) In oilcr woros. an cconomcirician calcnlaiin aniocorrclaiions nnconoiiionally wonlo
nno. in a larc samjlc. a josiiivc sinlc-la aniocorrclaiion. In conirasi. loncr-la jairs ol
jricc clancs ilai siraoolc ilc cxircmnm ol ilc imjnlsc rcsjonsc lnnciion will icno io c
ojjosco. ccansc a jricc clanc orawn lrom ilc ovcrrcaciion jlasc icnos io c ncaiivcly
corrclaico wiil a jricc clanc orawn lrom ilc corrcciion jlasc. 1lns. ilc ovcrconnocncc
ilcory jroviocs a oini cxjlanaiion lor oil slori-icrm momcninm ano lon-icrm rcvcrsals.
IroposItIon 12 1] .n: n]nn |nnj .nj h.nn |]-n:.h&.n, nnn .] :-
:n.n : ::.n . &].n|j j:nn&n|, |n | :. |nnj .| | r|.h. &nnn.-
.nn| |:-|nj .. n&::|n.n {nnn&n`) nnn |nj-|nj njn. n&::|n.n
{::n|`).
Accoroin io 1caoccsl ano 1iiman (1993). ilcir momcninm cviocncc is ... consisicni
wiil oclayco jricc rcaciions io nrm-sjccinc inlormaiion. 1lc moocl ol Scciion 3 is con-
sisicni wiil ilis inicrjrciaiion il ilc inlormaiion arrivin is jnlic. Howcvcr. Irojosiiion
12 sncsis an alicrnaiivc inicrjrciaiion. Wlcn connocncc varics. momcninm may occnr
noi ccansc ilc markci is slow io rcaci io ncws. ni ccansc ilc markci iniiially ovcrrcacis
io ilc ncws. ano laicr coniinncs ilis ovcrrcaciion cvcn lnrilcr wlcn lnrilcr jnlic ncws
arrivcs.
89
37
Aulocovuiiuncos involving long-iun piico chungos lhul oxlono lo lho loininul oulo, such us cov(1
3

1
l
, 1
l
1
u
), cov(1
3
1

3
, 1

3
1
u
), uno cov(1
3
1
2
, 1
2
1
u
) will ulso Lo nogulivo sinco lhoso involvo
ovoiiouclions uno lhoii coiioclions.
3S
If lho signul woio infoinulivo, / woulo, howovoi, nooo lo Lo sulcionlly luigo lhul on uvoiugo lho piico
ooos conlinuo lo ovoiioucl ul oulo 2.
39
An ulloinulivo possiLlo oxplunulion foi nononlun is u louo-lug olocl coning fion ooluyoo iouclion lo
infoinulion uLoul connon nuilol fuclois (Lo uno MucKinluy (1000)). Joguooosh uno 1ilnun (1008) lno
lhul such louo-lug olocls oo nol oxpluin lho 8-12 nonlh shoil-loin uulocoiiolulion of slocl ioluins.
2
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7
J.S A OynnnIc ^odoI of Outcono-Oopondont Conhdonco
Wc now cxicno ilis moocl io many jcrioos. Lccansc ilc analyiics ccomc iniracialc.
wc jrcscni nnmcrical simnlaiions. 1lc analysis imjlics jaiicrns ol sccnriiy jricc-clanc
aniocorrclaiions consisicni wiil ilc nnoins ol Scciion 4.2. Ii also yiclos imjlicaiions lor
ilc corrclaiion ciwccn jnlic inlormaiion annonnccmcnis (sncl as manacrs` lorccasis
or nnancial rcjoris ol salcs. casl nows or carnins) ano lninrc jricc clancs. Loil ilc
slori-icrm ano lon-icrm jaiicrns ol rcinrn aniocorrclaiions ocscrico in ilc iniroonciion.
oil nnconoiiionally ano in rclaiion io jnlic annonnccmcnis aoni nnancial jcrlormancc
mcasnrcs sncl as carnins or salcs. arc consisicni wiil ilis moocl ol iimc-varyin connocncc.
In ilc moocl. ilc invcsior las a jrior on ilc jrccision ol lis jrivaic sinal. ano nscs an
njoaiin rnlc ilai rcnccis scll-aiiriniion ias. Sincc connrmin sinals cansc ilc invcsior
io raisc lis csiimaic ol lis sinal`s jrccision morc ilan oisconnrmin sinals cansc lim
io rcvisc lis csiimaic oownwaro. on avcrac. ilc arrival ol jnlic inlormaiion canscs lis
csiimaic ol ilc jrccision ol lis sinal io incrcasc.
40
As a rcsnli a jricc wlicl is alrcaoy ioo
lil will. on avcrac. c jnslco siill lilcr y jnlic inlormaiion. Ii is ilis lcainrc ol
njoaiin rnlc ilai rcsnlis in ilc josiiivc aniocorrclaiion ol jricc clancs ai slori lorizons
ano in josiiivc jricc clancs lollowin carnins incrcascs.
Howcvcr. alicr ilc arrival ol n&j| jnlic inlormaiion. ilc jrccision ol ilc cnmnlaiivc
jnlic sinal ccomcs ovcrwlclminly siron. 1lns. so lon as invcsior connocncc cannoi
incrcasc wiiloni onnos. cvcn a vcry ovcrconnocni invcsior will c lorcco io rcconizc ilc
irnil. As a rcsnli ilc jricc asymjioics io ilc irnc valnc ol ilc sccnriiy. 1lis rcsnlis
in lon lorizon ncaiivc aniocorrclaiions in sccnriiy jricc clancs. consisicni wiil ilc
moocl in Scciions 3 ano 4.1. 1lns. ilc moocl imjlics ilai slori-icrm josiiivc clancs in
nnancial jcrlormancc mcasnrcs sncl as carnins or salcs. will icno io lorccasi lninrc josiiivc
jricc clancs (consisicni wiil Lcrnaro ano 1lomas (1989. 1990)). yci is also consisicni
wiil lon-icrm clancs in jcrlormancc mcasnrcs lorccasiin ncaiivc lninrc jricc clancs
(Lakonislok. Sllcilcr. ano \islny (1994)).
J.S.1 Tho ^odoI
Wc rciain ilc asic sirncinrc consiocrco in carlicr scciions. As clorc. ilc (nnoscrvalc)
valnc ol a slarc ol ilc nrm`s siock is

o ~ A(0, o
2
0
). 1lc jnlic noisc variancc o
2
0
is common
knowlcoc. Ai iimc 1. cacl inlormco invcsior rcccivcs a jrivaic sinal
1
=

o - wlcrc
du
Givon Liusoo solf-ulliiLulion, il nuy Lo usloo why conloonco ooos nol giuouully ovolvo lo Lo oxlionoly
sliong. 1ho unswoi lios in lho fucl lhul un ovoiconloonl inoiviouul will oispiopoilionuloly oflon iocoivo puL-
lic infoinulion lhul ioocls pooily on his infoinulion piocision, iolulivo lo his oxpoclulion. 1his lonooncy
opposos lho olocl of solf-ulliiLulion Lius on conloonco.
20
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o
f

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i
s

p
a
p
e
r
,

p
l
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a
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e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
- ~ A(0, o
2
c
). 1lc crror variancc o
2
c
is incorrccily jcrccivco y ilc invcsior. Hc csiimaics o
2
c
nsin ilc nn | rnlc ocscrico clow. On oaics 2 ilronl 1. a jnlic sinal

o
t
is rclcasco.

o
t
=

o j
t
. wlcrc j
t
is ....n ano j
t
~ A(0, o
2
j
). 1lc variancc ol ilc noisc. o
2
j
. is also common
knowlcoc. Wc also ocnnc 1
t
as ilc avcrac ol all jnlic sinals ilronl iimc t. ilai is:
1
t
=
1
(t 1)
t

t=2

o
t
= o
1
(t 1)
t

t =2
j
t
. (4)
1lc avcrac jnlic sinal 1
t
is a snmcicni siaiisiic lor ilc t 1 jnlic sinals. ano

1
t
~ A(o, o
2
j
,(t 1)). As clorc. an inlormco invcsior lorms cxjcciaiions aoni valnc
raiionally (nsin Laycsian njoaiin) cxccji lor lis jcrccjiions ol lis jrivaic inlormaiion
jrccision. In ilis rcaro. (1) lc may c iniiially ovcrconnocni (..., jlaccs ioo lil a
jrccision on lis own inlormaiion rclaiivc io ilc jnlic sinals) ano (2) morc imjorianily.
lc incorrccily njoaics lis clicls aoni ilc jrccision ol lis sinal asco on ilc jnlic sinals.
Ai iimc 1. ilc invcsior clicvcs ilai ilc jrccision ol lis sinal is
C,1
. wlicl is rcaicr ilan
ilc irnc jrccision
c
= 1,o
2
c
. Also. wc ocnnc o
2
C,1
= 1,
C,1
as ilc invcsior`s clicl aoni ilc
noisc variancc ol lis jrivaic sinal. 1lc ( snscriji lcrc ocnoics ilai ilis is noi ilc irnc
variancc. ni ilc clicl ol ilc (onnocni invcsior.
Ai cvcry snscqncni rclcasc ol jnlic inlormaiion ilc invcsior njoaics lis csiimaic ol
ilc variancc asco on an nn | njoaiin rnlc. Il ilc ncw jnlic sinal (o
t
) connrms ilc
invcsior`s jrivaic sinal
1
. ano ilc jrivaic sinal is noi ioo lar away lrom ilc jnlic sinal.
ilcn ilc invcsior ccomcs morc connocni in lis jrivaic sinal. Il ilc ncw jnlic sinal
oisconnrms lis jrivaic sinal. ilc invcsior rcviscs ilc csiimaico jrccision oownwaros. ni
noi y as mncl. 1lis njoaiin jroccss is consisicni wiil cviocncc ol iasco scll-aiiriniion.
Lccansc ol ilis oincrcniial rcsjonsc io jnlic inlormaiion. ilc arrival ol jnlic inlormaiion
on avcrac canscs ilc invcsior io rcvisc lis csiimaic ol ilc jrccision ol lis jrivaic inlormaiion
aovc lis irnc jrccision.
1lc njoaiin rnlc ilai wc imjlcmcni is:
il
_
:p:(
1
1
t>1
) = :p:(o
t
1
t>1
) ano [
1
1
t>1
[ < 2o
4,t
ilcn
C,t
= (1 /)
C,t>1
oilcrwisc
C,t
= (1 /)
C,t>1
,
wlcrc o
4,t
is ilc sianoaro ocviaiion ol 1 ai iimc t. Ininiiivcly. il a ncw jnlic sinal o
t
ocviaics lrom jasi inlormaiion in ilc samc oircciion as ilc jrivaic sinal. ano ilc jrivaic
sinal is noi ioo lar away lrom ilc jnlic sinal. ilcn ilc invcsior ccomcs morc connocni
in ilc jrivaic sinal. Wc imjosc ilc rcsiriciion ilai / / 0. 1lc raiio (1 /),(1 /)
is an inocx ol ilc invcsior`s aiiriniion ias.
41, 42
dl
Sovoiul ulloinulivo nn-| upouling iulos consislonl wilh lhis inluilion ull loo lo ioughly oguivulonl
sinululion iosulls.
d2
1ho invosloi is foining Loliofs us if, ul ouch poinl in lino, ho lnows oxuclly whul lho piocision of his
2
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i
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y

o
f

t
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i
s

p
a
p
e
r
,

p
l
e
a
s
e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Iinrc 3: Avcrac Iricc Iail Iollowin Irivaic Inlormaiion Slock
w/ Attribution Bias
w/o Attribution Bias
0 20 40 60 80 100 120
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
period
A
v
g
.

P
r
i
c
e
J.S.2 Tho EquIIIIrIun
Sincc ilc invcsior is risk-ncniral ano ilc risk-lrcc raic is zcro. ai cacl joini in iimc ilc
siock jricc is ilc cxjcciaiion ol iis icrminal valnc:
1
t
= 1
C
[

o[
1
, o
2
, . . . , o
t
[ = 1
C
[

o[
1
, 1
t
[.
Dcnnc
0
= 1,o
2
0
. ano
j
= 1,o
2
j
. 1lc jricc ol ilc sccnriiy ai iimc t is ivcn y:

1
t
= 1
C
[

o[
1
, 1
t
[ =
(t 1)
j
1
t

C,t

0

j

C,t
.
Iccall ilai ilc jrccision ol 1 is (t 1)
j
.
J.S.S SInuIntIon HosuIts nnd EnpIrIcnI InpIIcntIons
Ior ilc simnlaiion wc nsco ilc jaramcicrs / = 0.. / = 0.1. o
2
0
= 1. o
2
c
= 1. o
2
j
= .
Wc also makc ilc invcsior`s iniiial csiimaic ol lis jrccision cqnal io ilc irnc jrccision ol
lis jrivaic sinal. Wc jcrlormco ilis simnlaiion 0.000 iimcs. cacl iimc rcorawin ilc
signul is. Iulionully ho shoulo lulo inlo uccounl lho fucl lhul
9
is un oslinulo. 1his is oono sololy
foi liucluLilily; wo oxpocl lhul lho ossonliul iosulls woulo nol chungo woio lho invosloi lo incoipoiulo lho
oslinulion oiioi in
9
inlo his culcululions.
28
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o
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p
a
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e
r
,

p
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e

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i
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i
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:

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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Iinrc 4:
0 20 40 60 80 100 120
0
10
20
30
40
50
60
70
period
A
v
.

P
r
e
c
i
s
i
o
n
Average Estimated Precision Following Private Information Shock
valnc o ~ A(o, o

0
). ilc jrivaic sinal
1
= o -. ano ilc jnlic inlormaiion sci o
t
. lor
t = 2, . . . 1. Wc sci o io zcro wiiloni loss ol cncraliiy. Wc ilcn calcnlaic ilc avcrac
jricc ol ilc sccnriiy lor 120 jcrioos alicr ilc arrival ol ilc jrivaic sinal. 1lis is jloiico
in Iinrc 3.
Lclorc jrcscniin ilc lnll simnlaiion rcsnlis (wlcrc

o ano
1
arc orawn lrom oisirin-
iions) ii is nsclnl io illnsiraic somc ol ilc oynamics ol ilc moocl. Iinrc 3 slows ilc
avcrac jricc jail lollowin a jrivaic-sinal ol
1
= 1 wlcn

o = 0. ilai is wlcn an invcsior
rcccivcs a sinal ilai ilc sccnriiy is morc valnalc ilan ii acinally is. 1lc jricc iniiially
nmjs lrom 0 nj io 0.. wlicl is ilc csi csiimaic ol o ivcn
1
= 1 ano o
2
c
= o
2
0
(= 1).
On avcrac. ilc jricc n.n& movin nj. rcaclin a maximnm ol 0.300 in jcrioo 10.
Ai ilis joini ilc avcrac jricc siaris io occlinc. ano cvcninally asymjioics io zcro. 1lns.
wc scc ilai ilcrc is an iniiial ovcrrcaciion jlasc in wlicl ilc jricc movcs away lrom ilc
irnc valnc as ilc invcsior`s aiiriniion ias canscs lim io jlacc morc wcili. on avcrac.
on lis jrivaic inlormaiion. Ol conrsc. cvcninally ilc jnlic inlormaiion ccomc jrccisc
cnonl ilai ilc invcsior las io rcvisc oown lis clicls aoni ilc valnc ol ilc sccnriiy. 1lis
is ilc corrcciion jlasc. Iinrc 4 slows ilc invcsior`s scll-jcrccivco jrccision as a lnnciion
ol iimc. 1lis jloi rcvcals ilc rcason lor ilc raonal incrcasc in ilc sccnriiy jricc alicr ilc
arrival ol ilc jrivaic inlormaiion: ilc incrcasin avcrac csiimaico jrccision. Wc also scc
29
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i
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p
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o
f

t
h
i
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p
a
p
e
r
,

p
l
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a
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e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Iinrc : Avcrac Iricc-Clanc Aniocorrclaiions
10 20 30 40 50 60 70 80 90 100 110
0.02
0
0.02
0.04
0.06
0.08
0.1
lag
A
u
t
o

c
o
r
r
e
l
a
t
i
o
n
ilai. alicr a liiilc ovcr 20 jcrioos. ilc avcrac scll-jcrccivco jrccision cins io occlinc as
ilc cnmnlaiivc jnlic sinal ccomcs morc jrccisc. Howcvcr. ilis is only jari ol ilc rcason
ilai ilc jricc cins occlinin iowaro o = 0: 1lc jricc cins io occlinc. lor ilis cxamjlc.
wlcn ilc jrccision ol ilc jnlic sinal siaris io oominaic ilc jrccision ol ilc jrivaic sinal.
1lc invcsior`s csiimaico jrccision may siill c rowin. ni il ilc csiimaico jrccision ol
ilc jnlic sinal rows siill lasicr ilc jricc will occlinc.
48
1lcsc rcsnlis sncsi ilai sccnriiy jriccs slonlo cxliii momcninm in ilc slori rnn
ano lon rnn rcvcrsal. Howcvcr. ilcsc arc all conoiiional on
1
= 1 ano o = 0. Iinrc
jrcscnis ilc nnconoiiional avcrac aniocorrclaiions ol ilc jricc clancs in ilc simnlaiion.
wlcrc now o ano
1
arc rcsamjlco lor cacl Monic-Carlo iicraiion in ilc simnlaiion. Wc
cncraico ilis nnrc y calcnlaiin ilc jricc-clanc aniocorrcloram (ilc sci ol jricc-
clanc aniocorrclaiions ai las ciwccn 1 jcrioo ano 119 jcrioos) lor cacl Monic-Carlo
iicraiion. Wc ilcn nno ilc aniocorrclaiion ai cacl la y avcrain ovcr ilc 0.000 Monic-
Carlo oraws.
44
1lc rcsnliin jloi ol avcrac aniocorrclaiions in Iinrc connrms ilc
ininiiion ocrivco lrom Iinrc 3 ilai slori-la jricc clanc aniocorrclaiions arc josiiivc
d3
1his is lho iouson lhul lho pouls in Figuios 8 uno 4 oo nol lino up.
dd
1ho uulocoiiolulion is lho unconoilionul oxpoclulion, cov(:
9
, :
9
),o
2
(:). Givon lho noinulily ussunp-
lion hoio, lho piopoilios of lho Monlo-Cuilo uio such lhul, us lho nunLoi of Monlo-Cuilo iloiulions up-
piouchos inlnily, lho uvoiugo uppiouchos lho liuo uulocoiiolulion foi lho syslon.
30
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p
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o
f

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i
s

p
a
p
e
r
,

p
l
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a
s
e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Iinrc 0: Lon-Horizon Icrcssion Cocmcicni lor Iricc Clancs on Iricc Clancs
0 10 20 30 40 50 60 70 80 90 100
1
0.8
0.6
0.4
0.2
0
0.2
0.4
horizon
c
o
r
r
e
l
a
t
i
o
n
ano lon-la aniocorrclaiions arc ncaiivc.
Sincc mncl ol ilc nnancc liicrainrc las conccniraico on lon-lorizon rcrcssions (scc.
c... Iama ano Ircncl (1988)) railcr ilan mnlii-la aniocorrclaiion. wc also jrcscni ilc
avcrac lon lorizon rcrcssion cocmcicni lrom ilc moocl:
4
1lis is ilc avcrac (across ilc
Monic-Carlo oraws) ol ilc rcrcssion cocmcicni /
t
ilai is oiainco in ilc rcrcssions:

1(t, t t) = c
t
/
t

1(t t, t) -(t, t t),
wlcrc. ivcn ilc normaliiy ol ilc oisinrancc icrms. wc nsc ilc jricc clanc in jlacc ol
rcinrns (1(t, t t) = 1(t t) 1(t)).
1o cxaminc lon-lorizon rcrcssion cocmcicnis. Iinrc 0 jrcscnis ilc corrcsjonoin av-
crac lon-lorizon rcrcssion cocmcicnis. calcnlaico as a lnnciion ol ilc lorizon. Aain
ilc slori lorizon cocmcicnis arc josiiivc ano lon-lorizon cocmcicnis arc ncaiivc. consis-
icni wiil ilc cmjirical liicrainrc on momcninm ano rcvcrsals. Ior cacl la. lon-lorizon
corrclaiion cocmcicnis will lavc ilc samc sin as ilc lon-lorizon rcrcssion cocmcicnis
jrcscnico in Iinrc 0.
1lis imjlicaiion was asco on rclaiivcly cncral assnmjiions aoni inlormaiion arrival
jroccss. 1lc main rcqnircmcni. in aooiiion io ilc scll-aiiriniion ias. is ilai jnlic
d5
Il is sliuighlfoiwuio lo show lhul lhoio is u ono-lo-ono nupping Lolwoon piico chungo uulocoiiolulions
uno noio slunouio losl slulislics such us vuiiunco iulios oi long-hoiizon iogiossion coolcionls.
31
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p
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r
,

p
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a
s
e

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i
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i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
inlormaiion arrivc raonally. 1lcn. owin io aiiriniion ias. invcsiors will icno io inicrjrci
jnlic inlormaiion as cviocncc ilai ilcir jrivaic sinals arc ol lilcr jrccision ilan ilcy
iniiially clicvco. rcsnliin in a j:nn&n| ovcr-rcaciion io ilcir jrivaic inlormaiion. Ol conrsc.
cvcninally cnonl jnlic inlormaiion will arrivc so ilai ilc ovcrrcaciion will c corrccico.
46
1lc conclnsions ol ilis iniiial simnlaiion is snmmarizco as lollows.
HosuIt 1 1n | h.nn |]-n:.h&.n .nj ] o.n ., .] | :& |n: n|& o = 0
nnn | .n..n| :.n .jnn|
1
= 1, |n .| &].n n:.h&.n h.n | n:nj :.
n ]: :. nnn |n j:nn&n||j n|.n. J|. n:n .| n nn.|j n|.n.nj :. n|
.] |: . n n:.h&.n h.n. 1n | h.nn |]-n:.h&.n .nj, n:nj |]-:.n
:..n n| .n..n| |j :. nnn |n n|.n.
HosuIt 2 1n | h.nn |]-n:.h&.n .nj ] o.n ., |:-|nj n&::|n.n
{::|n.nj .nj|-:.n :. |nnj .| .nj|-:.n :. |nnj) n: .. nnn
|nj-|nj n&::|n.n n: njn..
HosuIt S 1n | h.nn |]-n:.h&.n .nj ] o.n ., |:-:n n&::|n.n
n: .. nnn |nj-|:..n n&::|n.n n: njn..
J.S.J CorroIntIon of Inst AccountIng Iorfornnnco vIth Futuro IrIco Chnngos
Iinally. wc consiocr ilc imjlicaiions ol ilis moocl lor ilc corrclaiion ciwccn acconniin
jcrlormancc ano lninrc jricc clancs. Acconniin inlormaiion (salcs. carnins. cic.) can
c ilonli ol as noisy jnlic sinals aoni o. so in ilis snscciion wc inicrjrci ilc o`s
as clancs in acconniin jcrlormancc mcasnrcs. 1lc rcsnlis ol 4.3.3 lor ilc jricc clanc
aniocorrclaiions slowco ilai. in rcsjonsc io a josiiivc jrivaic sinal. ilc jricc on avcrac
movcs nj lor scvcral jcrioos ano ilcn rcvcrscs. Consiocr now ilc nrsi jnlic sinal (ai
t = 2). Il ilc nrsi jnlic sinal is josiiivc. ii is likcly ilai ilc nrsi jrivaic sinal was
also josiiivc. Lasco on ilc momcninm rcsnlis in ilis scciion. ilis sncsis ilai jriccs will
coniinnc io incrcasc alicr ilc arrival oaic ol ilc jnlic sinal. 1lis is consisicni wiil ilc
cmjirical cviocncc ol Lcrnaro ano 1lomas (1989. 1990) on josi-carnins annonnccmcni
orili. Ol conrsc. cvcninally jriccs will movc oown aain as ilc cnmnlaiivc jnlic sinal
ccomcs morc jrccisc ano ilc inlormco invcsior cins io jni lcss wcili on lis own sinal.
1lns. ilc analysis ol ilis scciion sncsis ilai josi-carnins annonnccmcni orili. likc siock-
jricc momcninm. may c a jlcnomcnon ol coniinnin ovcrrcaciion.
47
In ilc lon-rnn. ol
conrsc. ilc sccnriiy jricc will rcinrn io iis lnll-inlormaiion valnc. imjlyin lon-rnn ncaiivc
do
Sinilui iosulls upply ovon if lho invosloi`s signul hus liuo piocision of 0 (noiso liuoing). All lhul is
ioguiioo is lhul ho h|. his piocision is posilivo.
d7
Howovoi, lho oiscussion of ovonl-sluoy inpliculions in SuLsoclion 8.8.8 oosciiLoo conoilions unooi
which posl-ouinings unnouncononl oiifl coulo Lo un unooiiouclion olocl.
32
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=
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1
7
Iinrc : Corrclaiion ciwccn Inlormaiion Clancs ano Ininrc Iricc Clancs
20 40 60 80 100 120
3
2
1
0
1
2
3
4
5
6
7
x 10
3
lag
C
r
o
s
s

c
o
r
r
e
l
a
t
i
o
n
corrclaiions ciwccn acconniin jcrlormancc ano lninrc jricc clancs. 1lis is consisicni
wiil ilc rcsnlis ol Lakonislok. Sllcilcr. ano \islny (1994) wlo nno ilai ilc covariancc
ciwccn jasi 3- ycar nnancial jcrlormancc mcasnrcs sncl as salcs rowil ano snscqncni
onc-ycar rcinrns is ncaiivc.
4S
1o connrm ilai sncl a jaiicrn can arisc wiil iasco scll-aiiriniion. wc aain calcnlaic
ilc avcrac corrclaiions nsin onr simnlaiion as lollows. Ior cacl

o
t
(lor t = 2, 120) wc
calcnlaic ilc carnins clanc. ocnnco as:
49
c
t
=

o
t
1
t
=

o
t
1[

o
t
[o
-
, = 2, . . . , t 1[
c
t
is ilc ocviaiion ol o
t
lrom iis cxjccico valnc asco on all jasi jnlic sinals.
0
dS
Sovoiul olhoi pupois, o.g., DoChow uno Sloun (1007), DoLonol uno 1huloi (108), uno DoLonol uno
1huloi (1087) ulso lno nogulivo long hoiizon iogiossion coolcionls ioluling pusl ioluins oi lnunciul poi-
foinunco nousuios lo suLsoguonl ioluins. 1his inplios lhul ono oi noio shoil hoiizon, long-lug iogiossion
coolcionls nusl Lo nogulivo (soo Apponoix D). In conliusl, Chun, Joguooosh, uno Lulonishol (1006) oo
nol iojocl lho null of no such u nogulivo iolulion, possiLly owing lo u lucl of powoi in oolocling long-iun
iovoisul.
d9
4
l
is oolnoo lo Lo 0, which foi lho sinululion is sol lo zoio.
5u
Nolo, howovoi, lhul lho oxpoclulion ignoios infoinulion uLoul lho piivulo signul (uno honco uLoul
fuluio puLlic signuls which coulo Lo oxliucloo fion lho piico. 1his is consislonl wilh Lulonishol, Shloifoi,
uno Vishny (1004), who uso pusl chungos in lnunciul poifoinunco nousuios such us sulos uno ouinings
giowlh, iulhoi lhun ouinings suipiisos, lo foiocusl fuluio ioluins.
33
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=
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1
7
1lcn. wc calcnlaic ilc sci ol samjlc corrclaiions ciwccn ilc c
t
ano jricc clancs t
jcrioos in ilc lninrc 1
tt
= 1
tt
1
tt >1
. 1lcsc corrclaiions arc ilcn avcraco ovcr
ilc 0.000 Monic-Carlo oraws. 1lc avcrac corrclaiions arc jloiico in Iinrc . Wc scc
ilai. as ilc ininiiion aovc sncsico. jasi carnins clancs arc josiiivcly corrclaico wiil
lninrc jricc clancs in ilc slori-rnn. ni arc ncaiivcly corrclaico wiil lon-rnn lninrc
jricc clancs. 1lis jaiicrn ol corrclaiions is aain consisicni wiil oil ilc cviocncc ol
Lcrnaro ano 1lomas (1989. 1990) ano Lakonislok. Sllcilcr. ano \islny (1994).
HosuIt S 1n | h.nn |]-n:.h&.n .nj ] o.n ., |:-|nj ::|n.n hn
.nj|-:.n | :. |nnj nnn n n:n.nj n: .., nnn |nj |nj ::|n.n
n: njn..
J.J InpIIcntIons for lndorronctIon vorsus OvorronctIon
In ilc siaiic moocl. invcsiors ovcrrcaci io jrivaic inlormaiion ano nnocrrcaci io jnlic
inlormaiion. Wc lavc sccn in ilc oynamic moocl ilai jnlic inlormaiion arrival can c
associaico wiil n.n&.nj ovcrrcaciion io a jrivaic sinal. 1lis is n a casc ol slori-
icrm nnocrrcaciion io ilc jrivaic sinal. nor ol a simjlc ovcrrcaciion io jnlic sinals. Il
ovcrconnocncc is lil. jriccs siill will nnocrrcaci io jnlic inlormaiion. 1lc imjoriani
ilin lcrc is ilai jriccs nnocrrcaci lcss wlcn ilc sinal is consisicni wiil ilc invcsior`s
jrivaic sinal. 1lns. ilc jnlic sinals on avcrac siimnlaic aooiiional ovcrrcaciion io ilc
jrivaic sinal. 1lc rcsnliin josi-jnlic-cvcni avcrac ircno in jricc clancs conlo casily
c misinicrjrcico as an nnocrrcaciion.
1lns. ilc conclnsion lrom ilc asic moocl ilai invcsiors ovcrrcaci io jrivaic sinals
lolos in ilc oynamic moocl. Howcvcr. wlilc invcsiors nnocrrcaci on avcrac io jnlic
sinals. ilis nnocrrcaciion is lcss (ano can cvcn c an ovcrrcaciion) lor inlormaiion ilai
connrms ilc qnaliiy ol an invcsior`s sinal.
^nnngorInI nnd HoIntod EnpIrIcnI InpIIcntIons
1lc analysis sncsis scvcral imjlicaiions lor manacrial jolicy. Snjjosc ilai manacrs
scrvc ilc inicrcsis ol cnrrcni slarclolocrs. ano ilai. in ilc sjirii ol Mycrs ano Malnl (1984).
cnrrcni slarclolocrs oo noi jariicijaic in ncw issncs. 1lcn ilc nrm slonlo raisc cajiial
wlcn ilc nrm`s siock is ovcrvalnco. as will icno c ilc casc alicr ilcir nrm`s siock jricc
las rcccnily incrcasco.
1
Similarly. il ilcrc is ovcrconnocni iraoin asco on inlormaiion
5l
1his follows fion lho iosull of nogulivo unconoilionul long-loin uulocoiiolulions in lho Lusic noool.
1ho shoil-loin nononlun lhul uiisos in lho oynunic noool (us in Soclion 4) coulo cioulo un inconlivo lo
wuil unlil lho slocl inciouso pouls, which ulso suppoils lhis olocl. Lvioonco lhul issuunco lonos lo follow
34
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,

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=
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0
1
7
aoni ilc markci as a wlolc ilai inonccs misjricin ol inoivional nrms. nrms slonlo issnc
alicr riscs in ilc siock markci as a wlolc.
2
1lc ilcory also sncsis ilai alicr siock jricc rnn-oowns. ilc nrm slonlo icno io c
iasco iowaros rilis insicao ol jnlic issncs. (1lis assnmcs ilai manacmcni maximizcs
ilc wcalil ol cnrrcni slarclolocrs. ano ilai ilcrc arc iransaciions cosis associaico wiil
oisjosals ol rilis ano slarcs. so ilai slarclolocrs cannoi cosilcssly nnoo ilc nrm`s aciions).
Similarly. alicr rnnoowns. ilc nrm slonlo iili iowaro oci railcr ilan cqniiy issncs io avoio
oilniin cnrrcni slarclolocrs. 1lns. ilc moocl sncsis a solniion io ilc laci (jnzzlin lrom
ilc jcrsjcciivc ol ojiimal cajiial sirncinrc ilcory) ilai alicr a risc in markci jriccs. nrms
icno io issnc morc cqniiy railcr ilan morc oci.
On ilc rcvcrsc sioc. il wc assnmc ilai ilc nrm acis in ilc inicrcsi ol rcmainin slarc-
lolocrs. alicr ilc nrm`s siock jricc las ccn risin. ilc nrm slonlo c iasco in lavor ol
rcjnrclasc insicao ol oiviocno (sincc siock is morc aiiraciivc io ny wlcn ii is nnocrvalnco).
Ioraczyk. Lncas. ano McDonalo (1991) lavc cmjlasizco ilc inccniivc ol manacrs
io oisclosc as mncl as jossilc jrior io a ncw issnc ano io oclcr raisin cajiial nniil al-
icr inlormaiion cvcnis sncl as anoiico carnins rcjoris. Lnocr lnll raiionaliiy. ilcrc arc
siron jrcssnrcs io oo ilcsc ilins in orocr io allay invcsior skcjiicism associaico wiil ilc
manacr`s inlormaiional aovaniac. Il invcsiors arc ovcrconnocni. ilcy may noi aocqnaicly
oisconni lor ilc jnlic rcvclaiion ol ao ncws imjlicii in ilc occision io issnc. In sncl
a sciiin. manacrs may lojc io cxjloii invcsiors y noi oisclosin. or y issnin clorc
crcoilc rcvclaiion.
Howcvcr. in ilc onicomc-ocjcnocni connocncc moocl. ilcrc is an onsciiin cncci. Snj-
josc ilai nrms arc issnin wlcn ilc nrm is ovcrvalnco. In onr moocl. ilcsc arc jcrioos
wlcn invcsiors lavc ovcrrcacico io lavoralc jrivaic sinals. Scciion 4 slows ilai somciimcs
an aooiiional jnlic oisclosnrc can on avcrac inicnsily ilc ovcrrcaciion io jrior lavoralc
inlormaiion. 1lis wonlo cncni ilc issncr.
Sincc in an onicomc-ocjcnocni sciiin connocncc onrin somc jcrioos on avcrac in-
crcascs alicr an carnins annonnccmcni. a lcss ncaiivc siock jricc rcaciion io issnancc is
jrcoicico. 1lis is ccansc. owin io iasco scll-aiiriniion. jnlic ncws on avcrac rcin-
lorccs jrior ovcrconnocncc. So il manacrs iry io issnc wlcn ilc markci ovcrvalncs ilc
nrm. ii may c csi io waii nniil alicr a noisy jnlic oisclosnrc. Ioraczyk. Lncas. ano
McDonalo (1991) jrovioc cviocncc snjjoriin ilis jrcoiciion. Onr ilcory las ilc oisiinci
iunups is pioviooo Ly Lucus uno McDonulo (1000).
52
Coiiosponoing lo piooiclions uLoul issuunco ufloi iunups uio inpliculions uLoul issuunco whon
Loolnuilol iulios uio low; soo Duniol, Hiishloifoi, uno SuLiuhnunyun (1007). 1hoso inpliculions uio
ulso suppoiloo Ly oxisling ovioonco.
3
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=
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1
7
nnicsico imjlicaiion ilai ilc rconciion in ilc asolnic maniinoc ol ilc jricc oroj slonlo
c rcaicr alicr a ooo ncws oisclosnrc ilan alicr a ao ncws oisclosnrc. 1lis is ccansc
ooo ncws on avcrac rcinlorccs jrior ovcrconnocncc. so ilai invcsiors jlacc lcss wcili
on ilc ao ncws inlcrcni in ilc cqniiy issnc. 1lis cncci is noi an imjlicaiion ol ilc Io-
raczyk. Lncas. ano McDonalo (1991) ajjroacl. sincc cvcn a ao ncws oisclosnrc rconccs
inlormaiion asymmciry. In conirasi. ilcir moocl sncsis varialcs rclaiin io rconciion
in inlormaiion asymmciry (sncl as clancs in io-ask sjrcaos or oisjcrsion ol analysis`
lorccasis. cic.).
1lc cvcni-sinoy inicrjrciaiion ol ilc moocl in Scciion 3.3.3 was asco on ilc jrcmisc
ilai manacrs iakc aciions in rcsjonsc io jcrccivco misjricin y ilc markci. Wc lavc
in mino a sciiin wlcrc ilc inlormco` iraocrs ol ilc moocl arc a roao sci ol onisioc
markci jariicijanis wlo arc snmcicnily nnmcrons io lavc a maor cncci on jriccs. 1lis
oocs noi jrcclnoc ilc jossiiliiy ilai manacrs arc irraiionally ovcrconnocni as wcll. Il
ilcir inlormaiion oincrs lrom ilai ol onisiocrs. insiocrs will c alc io iocniily onisiocr`s
crrors ano iakc aciions in rcsjonsc io markci jricin crrors.
Insiocr iraoin oocs noi corrcsjono cxacily wiil onr moocl. sincc ii involvcs iwo scis ol
inlormco iraocrs (corjoraic insiocrs. ano inlormco onisiocrs) jrivaicly iraoin. Ior lilly
liqnio siocks. il nnoisclosco insiocr iraoin las only a moocsi imjaci on jricc. ilc cvcni
sinoy inicrjrciaiion ol ilc moocl slonlo ajjly io ilc cvcni ol jnlic oisclosnrc ol ilc insiocr
iraoc. Ior sncl nrms. ilc moocl jrcoicis lavoralc anormal jcrlormancc lollowin insiocr
jnrclascs. ano nnlavoralc jcrlormancc alicr salcs.
Howcvcr. il insiocrs arc ovcrconnocni ano ancci jricc. ilcn ilcrc may c ovcrrcaciion
io insioc inlormaiion sinals. Alilonl insiocrs will siill on avcrac makc moncy on ilcir
iraocs. ilc jricc movcs associaico wiil insiocr iraocs may jarily rcvcrsc in ilc lon rnn.
1lc moocl sncsis ilai sncl an cncci wonlo c morc likcly io c lonno in a ilinly iraoco
siock wlcrc insioc iraocs can snsianiially imjaci jricc.
8
6 HoIntIon to ExIstIng ThoorIos
As mcniionco in ilc iniroonciion. smari inoivionals can jroni y iraoin aainsi ilc mis-
jricin. 1lis aiicnnaics ilc cnccis ol qnasi-raiional iraocrs. Howcvcr. so lon as ovcrconn-
53
Il is nol cloui lhul ovoiconloonco is us inpoilunl foi insioois us foi oulsioois. Ovoiconloonco cunnol
Lo inpoilunl foi u oocision nuloi whoso liuo piocision is voiy high. In lho linil, un inoiviouul whoso noiso
vuiiunco is liuly zoio cunnol Lo ovoiconloonl. 1ho onpiiicul ovioonco oiscussoo ouilioi of piico unooiiouclion
lo lho oisclosuio of insiooi liuoos is consislonl wilh insioois Loing only noooslly ovoiconloonl oi iulionul,
uno lhoiofoio nol liuoing sulcionlly lo cuuso piico ovoiiouclion. Il is ulso possiLlo lhul insiooi liuoing
iogululions, woullh consliuinls oi iisl uvoision linils lho piico inpucl of ovoiconloonl insioois.
30
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7
ocni iraocrs arc risk avcrsc (in conirasi wiil onr simjlilyin assnmjiion ol risk ncniraliiy)
ano qnasi-raiional iraocrs arc a snsianiial jari ol markci. jriccs will c innncncco sn-
sianiially y ilcir crrors.
1lc morc sinincani occiion io moocls wiil imjcrlccily raiional iraocrs is ilai wcalil
may slili lrom loolisl io raiional iraocrs nniil jricc-sciiin is oominaico y raiional iraocrs.
In cncral. ilis ncco noi c ilc casc. DcLon. Sllcilcr. Snmmcrs ano Waloman (1990a.
1991) joini oni ilai il iraocrs arc risk avcrsc. a iraocr wlo nnocrcsiimaics risk will allocaic
morc wcalil io risky asscis. ano may c rcwaroco lor carin lilcr risk wiil lilcr
cxjccico rcinrns.
4
Il. as in onr moocl. iraocrs arc ovcrconnocni aoni cnninc inlormaiion
sinals. ilc icnocncy lor ovcrconnocncc io incrcasc jronis may c cvcn sironcr.
Inocco. il mosi inoivionals lavc iasco scll-aiiriniion. ilcn cvcn il ovcrconnocni inoi-
vionals carn lowcr jronis. ovcrconnocncc conlo c imjoriani in ilc lon rnn. 1lis wonlo
occnr ccansc ilosc wlo oo wcll cno nj oil conirollin morc wcalil ano ccomin morc
ovcrconnocni.
A oisiinci rcason wly ovcrconnocni iraocrs may onijcrlorm raiional iraocrs is ilai
cin ovcrconnocni is likc a commiimcni io iraoc arcssivcly. Wlcn ilcrc arc only a lcw
inlormco iraocrs jlayin siraicically. ilosc known io c ovcrconnocni may carn lilcr
rcinrns (scc Iylc ano Wan (1990)).
Scvcral oilcr jrcvions jajcrs lavc cxaminco ovcrconnocncc ano sccnriiics markcis. In
Wan (199). ilc nninlormco arc willin io iraoc wiil ovcrconnocni inlormco. so inlormaiion-
asco iraoin occnrs wiiloni noisc iraocrs. Oocan (199) cxamincs mooincaiions ol sian-
oaro microsirncinrc moocls ilai allow lor ovcrconnocncc aoni a jrivaic sinal. io cxaminc
issncs ol volaiiliiy. volnmc. ano markci ocjil. Hc nnos ilai ovcrconnocncc ano nnocr-
wciliin ol jriors imjlics incrcasco volaiiliiy ano ncaiivc rcinrn aniocorrclaiion. Wc
cxaminc a moocl ilai inclnocs a jnlic as wcll as a jrivaic sinals. Wc slow ilai in ao-
oiiion io ovcrrcaciion io jrivaic sinals. ilcrc is nnocrrcaciion io jnlic sinals. ano. wiil
iimc-varyin connocncc. raonal ovcrrcaciion io jrivaic sinals. 1lns. in conirasi wiil
Oocan. wc nno lorccs iowaro josiiivc as wcll as ncaiivc aniocorrclaiion: ano wc arnc ilai
ovcrconnocncc can occrcasc volaiiliiy aronno jnlic ncws cvcnis.
Hirsllcilcr. Snralmanyam. ano 1iiman (1994) cxaminc ilc cncci ol ovcrconnocncc
y analysi,iraocrs wlo ovcr-asscss ilc jroailiiy ol ilai ilcy rcccivc inlormaiion clorc
oilcrs. 1lis incrcascs ilcir icnocncy io lcro in sclcciin siocks io sinoy.
Onr ajjroacl assnmcs ilc maximnm amonni ol raiionaliiy consisicni wiil ovcrconn-
5d
1ho foinoi pupoi is Lusoo on noiso liuoois who nispoicoivo oxpocloo ioluins. 1ho lulloi pupoi fo-
cusos on lho suivivul of iiiulionul liuoois, Lul ooos nol oxunino infoinulion signuls oi oguiliLiiun piico
ooloininulion.
3
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7
ocncc. In conirasi. ii conlo c assnmco ilai ilc `s oon`i cvcn know ilai ilc &`s lavc
a oincrcni ojinion aoni ilc jrivaic sinal noisc: or ilai ilc &`s oon`i know ilai ilc `s
know ilai &`s ilinks ilai 1 arc ovcrconnocni: ano so on in a joicniially nnlimiico sci ol
jossilc misjcrccjiions. Caallc ano Sakovics (1990) analyzc ilis jossiiliiy. Lcnos (1990)
cxamincs a microsirncinrc moocl in wlicl iraocrs arc ovcrconnocni aoni ilcir knowlcoc
ol ilc sinals ol oilcrs. ano misiakcnly clicvc ilcy ilcy know valnc jcrlccily.
1lcrc arc jrcvions ano conicmjorancons moocls imjlyin josiiivc or ncaiivc rcinrns
aniocorrclaiions. Wan (1993) jroviocs a moocl wlcrc siock rcinrns arc ncaiivcly an-
iocorrclaico as a conscqncncc ol mcclanisiic noisc iraocs. Onr ilcory oincrs in slowin
ilai ovcrconnocncc ano iasco scll-aiiriniion can cansc imjcrlcci aonsimcni io ncw in-
lormaiion. Ii is ilcrclorc consisicni wiil ciilcr josiiivc or ncaiivc aniocorrclaiions ai
oincrcni las. Dc Lon. Sllcilcr. Snmmcrs. ano Walomann (1990) joini oni ilai a nnm-
cr ol cmjirical oscrvaiions aoni sccnriiy rcinrn aniocorrclaiions ano ovcrrcaciions can
c cxjlainco y ilc assnmjiion ilai somc iraocrs mcclanisiically lollow josiiivc lccoack
invcsimcni siraicics. Onr ajjroacl oincrs in cxjliciily mooclin ilc qnasi-raiional clav-
ior ol (ovcrconnocni) acnis. ano in locnsin on ilc oincrin cnccis ol jnlic vcrsns jrivaic
inlormaiion arrival. 1lc moocl lcrc jroviocs a jossilc jsycloloical microlonnoaiion lor
a sioclasiic icnocncy lor josiiivc lccoack iraoin as a conscqncncc ol clancs in conn-
ocncc. 1lc josiiivc lccoack clavior ocrivco lcrc comcs lrom iraocrs wlo iook josiiions
jrcvionsly. ano wlosc connocncc incrcascs asymmcirically morc wlcn snscqncni jnlic
inlormaiion connrms ilcir aciions.
In a conicmjorancons jajcr. Larcris. Sllcilcr. ano \islny (1990) jrovioc a moocl con-
sisicni wiil ilc slori ano lon icrm rcinrn aniocorrclaiions ano nnancial jcrlormancc,rcinrn
corrclaiions cmjirically oscrvco. In ilcir moocl. carnins lollow a ranoom walk. ano inoi-
vionals clicvc ilai ciilcr carnins lollow a sicaoy rowil ircno. or clsc ilai carnins arc
mcan-rcvcriin. 1lcy ocrivc imjlicaiions lor rcinrns aniocorrclaiions ano carnins-rcinrn
corrclaiions asco on invcsiors rcvisin ilcir clicls as io wlicl jroccss a nrm`s carnins arc
ocyin. 1lcy oo noi cxjlorc issncs rclaico io jnlic-inlormaiion rclcascs ano cvcni-sinoics.
1lc noisc iraocr ajjroacl io sccnriiics anomalics is asco on ilc rcconiiion ilai
ilcrc is variailiiy in jriccs arisin lrom nnjrcoicialc ano jossily irraiional iraoin ilai
sccms nnrclaico io valio inlormaiion. Howcvcr. wc also ilink ilai an imjoriani class ol
misiakcs y invcsiors involvcs ilc misinicrjrciaiion ol jn&.n ncw jrivaic inlormaiion.
1lns. irraiional crrors may c corrclaico wiil lnnoamcnials. ano inlormco iraocrs may noi
c lrcc ol ias.
`oisc iraoin can c vicwco as a limiiin casc ol ovcrconnocni iraoin in wlicl. loloin
consiani ilc inoivional`s jcrccivco jrccision. ilc sinal ccomcs vcry noisy. 1lis lcaos
38
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f

t
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p
a
p
e
r
,

p
l
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a
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e

v
i
s
i
t
:

h
t
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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
io non-ncliilc iraocs rcsnliin lrom vcry liiilc inlormaiional siimnlns. 1lns. ilc noisc
iraocr ajjroacl can c vicwco as a sjccial kino ol ovcrconnocncc moocl. 1lis jajcr ocrivcs
somc imjlicaiions ol oil ovcrconnocni noisc iraoin. ano ol ovcrconnocncc wlcn iraocrs
lavc non-ncliilc jrivaic inlormaiion.
Onr moocl cnoocnizcs noisc iraoin qnasi-raiionally. in ilc scnsc ilai inoivionals max-
imizc niiliiy raiionally. cxccji lor ilcir misiakcn clicls aoni sinal jrccision. Many sc-
cnriiics markcis moocls inclnoc vcry oincrcni kinos ol inoivionals. raiional vcrsns mccla-
nisiically noisy. Qnasi-raiionaliiy ol noisc iraoin jlaccs rcsiriciions on ilc iimc jaiicrn
ol iraocs. ano makcs ojiimal noisc josiiions ocjcnocni on low jricc movcs. 1lcsc iimc-
jaiicrns ano raiional jricc-ocjcnocncc jlay a crncial rolc in scvcral ol ilc imjlicaiions ol
onr ilcory.

7 ConcIusIon
Lmjirical sccnriiics markcis rcscarcl in ilc lasi ilrcc occaocs las jrcscnico a ooy ol cvi-
ocncc ilai is noi casy io cxjlain nsin jlansilc. jnrcly raiional assci jricin moocls. Somc
sinoics conclnoc ilai ilc markci nnocrrcacis io inlormaiion. wlilc oilcrs nno cviocncc ol
ovcrrcaciion. Wc lavc lackco a ilcory io inicraic ilis cviocncc. Alilonl clavioral ly-
joilcscs ol ciilcr nnocrrcaciion or ovcrrcaciion lavc ccn jrojosco. an inicraico ilcory
is nccoco io makc jrcoiciions aoni wlcn ovcr- or nnocrrcaciion will occnr.
1lis jajcr oncrs a ilcory ol sccnriiy rcinrns anomalics asco on invcsior ovcrconnocncc
ano on clancs in connocncc rcsnliin lrom iasco scll-aiiriniion ol ilc imjlicaiions ol
ncws arrival. 1lcsc assnmjiions arc asco on cxicnsivc jsycloloical cviocncc. 1lc ilcory
imjlics ilai invcsiors will ovcrrcaci io jrivaic inlormaiion sinals ano nnocrrcaci io jnlic
inlormaiion sinals. Wc slow ilai josiiivc aniocorrclaiions ano josi-jnlic-annonnccmcni
orilis` arc noi ncccssarily a rcsnli ol nnocrrcaciion. 1lc ilcory also jroviocs a lramc-
work ilai clarincs wlai sncl cviocncc n imjly aoni invcsior ovcr- or nnocrrcaciion io
inlormaiion.
Wc ajjly ilc ilcory io ocrivc an inicraico cxjlanaiion lor a variciy ol classcs ol
55
1ho Lohuvioi of oiscounls uno pioniuns in closoo-ono nuluul funos hus Loon uooucoo us ovioonco lhul
noiso liuoing oi nuilol sonlinonl` uio inpoilunl in oguily nuilols (soo Do Long, Shloifoi, Sunnois, uno
Wulonunn (1000u), Loo, Shloifoi, uno 1huloi (1001)). Unooi lho nuilol sognonlulion ussunplions nuoo Ly
lhoso uulhois, lho iolulions founo in sovoiul onpiiicul sluoios Lolwoon snull lin ioluins uno closoo-ono funo
oiscounls (which uio ossonliully lilo nuilolLool iulios) will gonoiully holo in un ovoiconloonco sollings
us woll. Sinco, in un ovoiconloonco solling, nispiicing uiisos fion ovoiiouclion lo jnu.n infoinulion,
chungos in funo oiscounls shoulo ulso Lo uLlo lo piooicl fuluio fuluio uccounling poifoinunco, nol jusl slocl
ioluins. Swuninulhun (1006) lnos such piooiclivo powoi. Foi fuilhoi oiscussion, soo Duniol, Hiishloifoi,
uno SuLiuhnunyun (1007).
39
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,

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a
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v
i
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:

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t
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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
anomalons sccnriiy jricc jaiicrns oocnmcnico in nnmcrons cmjirical sinoics. 1lc ilcory
also las imjlicaiions lor corjoraic nnancin ano jayoni jaiicrns. ano jroviocs a variciy ol
ncw cmjirical imjlicaiions.
40
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,

p
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i
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:

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t
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:
/
/
s
s
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.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
AppondIx A: CovnrInnco nnd VnrInnco CnIcuIntIons for tho HnsIc ^odoI
CovarIancos and YarIancos of SubsoctIon 3.3
(All signs uio unooi lho ovoiconloonco ussunplion lhul o
2
c
o
2
C
.)
Fion (2), lho covuiiunco Lolwoon lho oulo 8 uno lho oulo 2 piico chungos is
cov(1
8
1
2
, 1
2
1
1
) =
o
6
0
o
2
C
o
2
j
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)[o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
[
2
.
1his is posilivo sinco o
2
c
o
2
C
.
1ho covuiiunco Lolwoon lho oulo 1 piico chungo uno lho oulo 2 piico chungo is
cov(1
2
1
1
, 1
1
1
0
) =
o
6
0
o
2
C
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)
2
[o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
[
,
which, wilh ovoiconloonco, is nogulivo.
Il is ulso ousy lo show lhul
cov(1
8
1
1
, 1
1

0) =
o
4
0
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)
2
< 0
cov(1
8
1
2
, 1
1

0) =
o
4
0
o
2
j
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)[o
2
c
(o
2
0
o
2
j
) o
2
0
o
2
j
[
< 0. ()
Sinco 1
8
= 0, uno using lho oxpiossion foi 1
2
in (2),
cov(1
8
1
2
, c
A
) =
o
2
c
o
2
j
o
2
0
(o
2
0
o
2
j
)(o
2
C
o
2
c
)
[o
2
c
(o
2
0
o
2
j
) o
2
0
o
2
j
[[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[
,
which is posilivo so long us o
2
C
< o
2
c
.
1ho vuiiunco of lho oulo 2 piico chungo is
vui(1
2
1
1
) =
o
4
C
[o
4
C
o
6
0
o
S
0
o
2
c
o
4
0
o
2
j
(o
2
C
o
2
0
)
2
[
[o
2
C
(o
2
j
o
2
0
) o
2
0
o
2
j
[
2
(o
2
0
o
2
C
)
2
,
which cun oilhoi inciouso oi oociouso in o
2
C
.
1ho oulo 1 piico volulilily:
vui(1
1
1
0
) =
o
4
0
(o
2
0
o
2
c
)
(o
2
0
o
2
C
)
2
oociousos wilh o
2
C
,
1ho unconoilionul volulilily is jusl lho uvoiugo of vui(1
8
1
2
), vui(1
2
1
1
), uno vui(1
1
1
0
),
which is
1
8
_
o
2
c
o
4
j
o
4
0
o
4
C
o
2
j
o
2
0
(o
2
j
o
2
0
)
[o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
[
2

o
4
C
o
4
C
o
6
0
o
S
0
o
2
c
o
4
0
o
2
j
(o
2
C
o
2
0
)
2

(o
2
C
o
2
0
)
2
[o
2
C
(o
2
j
o
2
0
) o
2
0
o
2
j
[
2

o
4
0
(o
2
0
o
2
c
)
(o
2
0
o
2
C
)
2
_
.
Whon lhoio is no ovoiconloonco, o
2
C
= o
2
c
, lhis iooucos lo o
2
0
,8. 1ho oxcoss volulilily is lho
oiloionco Lolwoon lho uLovo oxpiossion uno o
2
0
,8,
2o
4
0
(o
2
c
o
2
C
)[o
4
C
(o
4
j
o
2
0
o
2
j
o
4
0
) o
2
C
o
2
j
o
2
0
(2o
2
j
o
2
0
) o
4
j
o
4
0
[
8(o
2
C
o
2
0
)
2
[o
2
C
(o
2
0
o
2
j
) o
2
j
o
2
0
[
2
.
41
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c
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p
a
p
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r
,

p
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a
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v
i
s
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:

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p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
1his is posilivo so long us lhoio is ovoiconloonco, o
2
C
< o
2
c
.
Froofs of Sono CIaIns In SubsoctIon 3.3.3
FroosItIon : Donolo lho oulo 2 nispiicing us `1
2
. Suppiossing uigunonls on 1
1
2
(
2
) uno
1
C
2
(
2
) foi oxposilionul convonionco, wo huvo lhul `1
2
= 1
1
2
1
C
2
= 1(0 1
C
2
(
2
)[
1
,
2
). Ly
lho piopoilios of noinul iunoon vuiiuLlos, lhis inplios lhul lho vuiiuLlo r = 01
C
2
`1
2
, which
is lho iosiouul fion lho iogiossion of 0 1
C
2
on
1
uno
2
, is oilhogonul lo
1
uno
2
. Supposo wo
picl u vuiiuLlo j = )(
1
,
2
) which is oilhogonul lo `1
2
. Such u vuiiuLlo will Lo oilhogonul lo
r, so lhul wo huvo cov(0 1
C
2
`1
2
, j) = 0. Sinco cov(`1
2
, j) = 0 Ly consliuclion, il follows
fion lho linouiily of lho covuiiunco opoiuloi lhul cov(0 1
C
2
, j) = 0. A convoiso uigunonl shows
lhul if wo picl u vuiiuLlo j

= q(
1
,
2
) which is oilhogonul lo lho posl ovonl ioluin 0 1
C
2
lhon
cov(`1
2
, j

) = 0. 1hus, ull funclions of

1
uno
2
uio oilhogonul lo `1
2
if uno only if lhoy uio
oilhogonul lo lho posl ovonl ioluin 0 1
C
2
.
Foi lho spocilc cuso whon lho ovonl ooponos linouily on
2
, wo huvo fion (2) lhul
1
8
1
2
=
o
2
C
o
2
j
0 o
2
j
o
2
0
c o
2
C
o
2
0
j
o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
Sinco
2
is oolnoo us 0 j, fion lho uLovo oxpiossion, il innooiuloly follows lhul
cov(1
8
1
2
,
2
) =
o
2
C
o
2
j
o
2
0
o
2
C
o
2
0
o
2
j
o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
which oguuls zoio, lhus showing lhul ull ovonls lhul oopono only on
2
uio non-soloclivo ovonls.
FroosItIon 6: Using slunouio noinul oisliiLulion piopoilios,
c
A
= 1[c[1
1
, 0 j[ =
o
2
c
(o
2
0
o
2
j
)(0 c) o
2
0
o
2
c
(0 j)
o
2
c
(o
2
0
o
2
j
) o
2
0
o
2
j
. (6)
Il is sliuighlfoiwuio lo show lhul lho iulio of lho oulo 2 nispiicing lo c
A
is givon Ly
o
2
c
[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[
o
2
j
o
2
0
(o
2
C
o
2
0
)
,
which is u conslunl (foi u givon lovol of conloonco). 1hus, soloclivo ovonls cun ulloinulivoly Lo
viowoo us ovonls lhul uio linouily ioluloo lo c
A
.
High vuluos of c
A
signify ovoipiicing uno low vuluos unooipiicing. 1ho pioposilion follows Ly
oLsoiving lhul
cov(1
8
1
2
, c
A
) =
o
2
c
o
2
j
o
2
0
(o
2
0
o
2
j
)(o
2
C
o
2
c
)
[o
2
c
(o
2
0
o
2
j
) o
2
0
o
2
j
[[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[
< 0
uno
cov(1
2
1
1
, c
A
) =
o
2
C
o
2
c
o
4
0
[o
2
c
(o
2
j
o
2
0
) o
2
j
o
2
0
[
(o
2
C
o
2
0
)[o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
[
2
< 0

FroosItIon 7:
42
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p
a
p
e
r
,

p
l
e
a
s
e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Foi puil (2), lho unulysl oLsoivos lho piivulo signul 0 c uno iulionully ussossos ils oiioi
vuiiunco. His foiocusl is lhoiofoio
1[0 j[0 c[ =
o
2
0
o
2
0
o
2
c
(0 c).
Il follows lhul
cov(1
8
1
2
, .) =
o
2
j
o
4
0
(o
2
c
o
2
C
)
[o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
[(o
2
c
o
2
0
)
,
which is posilivo unooi ovoiconloonco (o
2
C
< o
2
c
).
FroosItIon 8: Wo inloipiol lho funounonlulpiico` iulio us

0 1
1
. Foi puil (1),
cov(1
1
, c
A
) =
o
2
c
[o
2
c
(o
2
j
o
2
0
) o
2
j
o
2
0
[
o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
0
Also,
c
A
= /
1

1
/
2

2
,
whoio
/
1
=
o
2
c
(o
2
0
o
2
j
)
o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
(7)
/
2
=
o
2
c
o
2
0
o
2
C
(o
2
j
o
2
0
) o
2
j
o
2
0
. (8)
1his inplios lhul lho oisliiLulion of c
A
conoilionul on 0 c is noinul wilh noun
(/
1
/
2
)o
2
0
/
1
o
2
c
o
2
0
o
2
c
(0 c)
uno vuiiunco
[(/
1
/
2
)o
2
0
/
1
o
2
c
[
2
o
2
0
o
2
c
(0 c).
1ho slunouioizoo cunululivo noinul oisliiLulion funclion of u noinul iunoon vuiiuLlo wilh
nonzoio noun uno vuiiunco is inciousing in ils noun. Sinco 1[c
A
[0 c[ is piopoilionul lo 0 c, lho
pioLuLilily conoilionul on 1
1
lhul c
A
oxcooos u givon lhiosholo vuluo (inoiculing occuiionco of lho
posilivo ovonl) is inciousing in 0 c. 1ho iovoiso holos foi u nogulivo ovonl, pioving puil (2).
AondIx H: DIscroto ^odoI of Outcono-Doondont Ovorconhdonco
Al lino 0, 0 hus u vuluo of 1 oi 1 uno un oxpocloo vuluo of zoio. Al lino 1, lho pluyoi
iocoivos u signul
1
, uno, ul lino 2, u signul
2
.
1
nuy Lo oilhoi H oi 1 whilo
2
nuy Lo oilhoi
l oi 1. Afloi ouch signul, lho pluyoi upoulos his piioi oxpocloo vuluo of 0.
1:(
1
= H[0 = 1) = j = 1:(
1
= 1[0 = 1)
1:(
2
= l[0 = 1) = = 1:(
2
= 1[0 = 1).
43
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=
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1
7
1ho pioLuLililios lhul 0 = 1, givon
1
uno
2
uio
1:(0 = 1[
1
= H) =
1:(
1
= H[0 = 1)1:(0 = 1)
1:(
1
= H)
=
j,2
j,2 (1 j),2
= j.
Whon
2
conlins
1
(oilhoi
1
= H,
2
= l oi
1
= 1,
2
= 1), lho pluyoi Loconos ovoiconloonl
uno ucls us if his piocision woio j
C
inslouo of j, so
1:(0 = 1[
1
= H,
2
= l) =
1:(
1
= H,
2
= l[0 = 1)1:(0 = 1)
1:(
1
= H,
2
= l)
=
j
C

j
C
(2 1) (1 )
.
Whon
2
is infoinulivo ( 1,2), lhis pioLuLilily oxcooos j
C
. Whon
2
ooos nol conlin
1
, lho
pluyoi ooos nol Locono ovoiconloonl, so
1:(0 = 1[
1
= H,
2
= 1) =
1:(
1
= H,
2
= 1[0 = 1)1:(0 = 1)
1:(
1
= H,
2
= 1)
=
j(1 )
j(1 ) (1 j)
.
Whon ovuluuloo wilh un infoinulivo signul
2
( 1,2), lhis pioLuLilily is loss lhun j. Wilh u
iisl nouliul pluyoi, lho piico of lho ussol wilh vuluo 0 cun Lo culcululoo linouily using lho uLovo
pioLuLililios. 1ho piico ul lino 0 (1
0
) is, Ly oolnilion, oguul lo 0. As 0 cun lulo on u vuluo of 1
oi 1, lho piico is (j)(1) (1 j)(1) oi, 2j 1, whoio j is lho pioLuLilily lhul 0 is 1.
1
1
[
-=H
= 21:(0 = 1[
1
= H) 1 = 2j 1
1
2
[
-=H,-=l
= 21:(0 = 1[
1
= H,
2
= l) 1 =
j
C
1
j
C
(2 1) (1 )
1
2
[
-

=H,-

=1
= 21:(0 = 1[
1
= H,
2
= 1) 1 =
j
j 2j
.
1ho ionuining piicos uio jusl lho nogulivo of lhoii iospoclivo synnoliicul piico uLovo.
1
1
[
-=1
= 1 2j
1
2
[
-=1,-=1
=
1 j
C

j
C
(2 1) (1 )
1
2
[
-=1,-=l
=
j
j 2j
.
1ho piico chungos uio ^1
1
= 1
1
1
0
= 1
1
uno ^1
2
= 1
2
1
1
. 1[1
1
[ = 0, so cov(^1
1
, ^1
2
) =
1[^1
1
^1
2
[. 1ho pioLuLililios of lho oighl possiLlo oulconos uio:
1:(0 = 1,
1
= H,
2
= l) = 1:(0 = 1,
1
= 1,
2
= 1) = j,2
1:(0 = 1,
1
= H,
2
= l) = 1:(0 = 1,
1
= 1,
2
= 1) = (1 j)(1 ),2
1:(0 = 1,
1
= H,
2
= 1) = 1:(0 = 1,
1
= 1,
2
= l) = j(1 ),2
1:(0 = 1,
1
= H,
2
= 1) = 1:(0 = 1,
1
= 1,
2
= l) = (1 j),2.
44
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=
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7
1ho piooucl ^1
1
^1
2
cun only lulo on lwo vuluos, Lusoo upon lho vuiious signul conLinulions:
[^1
1
^1
2
[
-

=H,-

=l
= [^1
1
^1
2
[
-

=1,-

=1
= (2j 1)
_
j
C
1
j
C
(2 1) (1 )
(2j 1)
_
= A.
[^1
1
^1
2
[
-=H,-=1
= [^1
1
^1
2
[
-=1,-=l
= (2j 1)
_
j
j 2j
(2j 1)
_
= Y.
ConLining lhoso lwo vuluos uno lho pioLuLililios uLovo, 1[^1
1
^1
2
[ cun Lo wiillon us (1c)A
cY whoio c = j 2j. Afloi sono culcululion, lho lwo conpononls of lhis oxpiossion uio us
follows:
(1 c)A =
2(2j 1)(2j j 1)(j
C
j j
C
j 2j
C
j j)
j
C
(2 1) (1 )
cY = 2j(2 1)(2j 1)(j 1).
ConLining lhoso lwo loins uno u gioul ooul of fucloiing piooucos lho lnul iosull,
1[^1
1
^1
2
[ =
2(2j 1)(j
C
j)(1 )
j
C
(2 1) (1 )
0. (0)
Whon lhoio is no ovoiconloonco (uno j
C
= j) lhis oxpiossion is zoio uno lho piico chungos huvo
zoio coiiolulion.
A Socond oIsy FubIIc SIgnaI
1ho noool so fui shows lhul ovoiiouclion cun Lo oxuggoiuloo Ly u possiLlo iiso in conloonco
liiggoioo Ly u noisy puLlic signul. Wo now uoo u socono noisy puLlic signul lo lho noool, so lhul
wo cun consiooi giuouul coiioclion of nispiicing. Signul
8
follows
2
uno cun lulo on ono of lwo
vuluo: G oi 1. 1ho piocision of lhis signul is us follows:
1:(
8
= G[0 = 1) = : = 1:(
8
= 1[0 = 1).
1his signul ooos nol ulocl conloonco. If lho pluyoi Loconos ovoiconloonl (uno ioplucos j wilh
j
C
) ufloi
2
, lhon lho pluyoi will conlinuo lo uso j
C
us his nousuio of lho piocision of
1
, ioguio-
loss of wholhoi
8
conlins
1
. As lhoio uio lwo possiLlo piicos ufloi lho lisl signul uno foui
possiLlo piicos ufloi lho socono, lhoio uio oighl possiLlo piicos ufloi oLsoivulion of lho lhiio signul.
As uLovo, Ly synnoliy, only hulf of lhoso piicos nooo lo Lo culcululoo. Using lho conoilionul
pioLuLililios, lho poiioo lhioo piicos uio:
1
8
[
-

=H,-

=l,-

=G
=
j
C
: (1 j
C
)(1 )(1 :)
j
C
: (1 j
C
)(1 )(1 :)
1
8
[
-=H,-=l,-

=1
=
j
C
(1 :) (1 j
C
)(1 ):
j
C
(1 :) (1 j
C
)(1 ):
1
8
[
-

=H,-

=1,-

=G
=
j(1 ): (1 j)(1 :)
j(1 ): (1 j)(1 :)
1
8
[
-=H,-=1,-

=1
=
j(1 )(1 :) (1 j):
j(1 )(1 :) (1 j):
.
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a
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t
=
2
0
1
7
Wilh lwo possiLlo vuluos foi 0, lhoio uio now sixloon possiLlo sols of 0,
1
,
2
,
8
ioulizulions.
Only
1
,
2
,
8
uio oLsoivoo Ly lho pluyoi, iosulling in oighl sols of possiLlo signul ioulizulions.
Whon culcululing lho covuiiuncos of piico chungos, only hulf of lhoso ioulizulions cun iosull in
uniguo piooucls of piico chungos, so wo oolno

i;
= ^1
i
^1
;
[
H,l,G
= ^1
i
^1
;
[
1,1,1
1
i;
= ^1
i
^1
;
[
H,l,1
= ^1
i
^1
;
[
1,1,G
C
i;
= ^1
i
^1
;
[
H,1,G
= ^1
i
^1
;
[
1,l,1
1
i;
= ^1
i
^1
;
[
H,1,1
= ^1
i
^1
;
[
1,l,G
.
Luch of lhoso foui possiLlo piooucls nusl lhon Lo woighloo Ly lhoii pioLuLilily of occuiionco lo
culcululo lho oxpocloo vuluo of lho piooucls of lho piico chungos (lho oxpocloo vuluo of ouch piico
is zoio). 1ho woighls foi lho
i;
conpononl of covuiiunco uio:
1:(H, l, G[0 = 1) 1:(H, l, G[0 = 1) = j:,2 (1 j)(1 )(1 :),2
1:(1, 1, 1[0 = 1) 1:(1, 1, 1[0 = 1) = j:,2 (1 j)(1 )(1 :),2.
Iiocoooing in lhis nunnoi, lho covuiiuncos uio:
1[^1
i
^1
;
[ = [j: (1 j)(1 )(1 :)[
i;

[j(1 :) (1 j)(1 ):[1
i;

[j(1 ): (1 j)(1 :)[C
i;

[j(1 )(1 :) (1 j):[1
i;
.
Whon culcululing 1[^1
1
^1
2
[ ouilioi,
12
uno 1
12
woio oguul lo A uno C
12
uno 1
12
woio oguul lo
Y , wilh lho : uno 1: fuclois fion
8
sunning lo ono. 1o sinplify lho ulgoLiu, lonpoiuiily lol ull
signuls huvo u piocision of j, wilh j
C
ioplucing j us lho piocision of lho lisl signul if ovoiconloonco
occuis (i.o., = : = j). 1ho covuiiuncos in lhis cuso uio:
1[^1
1
^1
2
[
v=q=j
=
2j(1 j)(2j 1)(j
C
j)
j
C
(2j 1) 1 j
0
1[^1
1
^1
8
[
v=q=j
=
2jj
C
(j 1)(j
C
j)(1 j
C
)(2j 1)
8
[j
C
(2j 1) 1 j[[j
C
(2j 1) (1 j)
2
[
< 0
1[^1
2
^1
8
[
v=q=j
=
4j
2
j
C
(j 1)
2
(j
C
j)(j
C
1)(2j 1)
2
(2j
C
1)
[j
C
(2j 1) 1 j[
2
[j
C
(2j 1) (1 j)
2
[
< 0.
1ho sizo of 1[^1
1
^1
2
[
v=q=j
uno 1[^1
2
^1
8
[
v=q=j
cun Lo conpuioo oiioclly. OLsoivo lho fol-
lowing:
1[^1
2
^1
8
[
v=q=j
=
2j(1 j)j
C
(1 j
C
)(2j 1)(2j
C
1)
[j
C
(2j 1) (1 j)[[j
C
(2j 1) (1 j)
2
[
1[^1
1
^1
2
[
v=q=j
.
1hul is, lho covuiiunco Lolwoon lho piico chungos in poiioos lwo uno lhioo is lho nogulivo of lho
covuiiunco of piico chungos in poiioos ono uno lwo nulliplioo Ly u fucloi. Login Ly oxunining
lho nunoiuloi of lhis fucloi. 1ho lisl lhioo conpononls, 2j(1 j), uio nuxinizoo whon j = 1,2
whilo lho noxl lwo conpononls, j
C
(1 j
C
), uio nuxinizoo whon j
C
= 1,2. 1ho piooucl of
lhoso lisl lvo conpononls nusl lhon Lo upwuioly Lounooo Ly 1,8. As lho lnul lwo conpononls,
40
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(2j 1)(2j
C
1), uio ouch upwuioly Lounooo Ly ono, lho onliio nunoiuloi is upwuioly Lounooo
ul 1,8.. As foi lho oononinuloi, lho oxpiossion j
C
(2j 1) (1 j) is nininizoo whon j
C
= j,
iosulling in un oxpiossion lhul is nininizoo ul 1,2 wilh u vuluo of j = 1,2. 1ho socono conpononl
of lho oononinuloi is siniluily nininizoo whon j
C
= j, iosulling in un oxpiossion lhul is nininizoo
whon j = 1,2, which piooucos u lowoi Louno of 1,4. 1ho oononinuloi, lhon, is Lounooo Lolow
Ly 1,8, which conLinoo wilh u nunoiuloi Lounooo uLovo Ly lho suno vuluo piooucos u fiuclion
Lounooo uLovo Ly ono. 1hoiofoio, lho nogulivo covuiiunco Lolwoon poiioo lwo uno poiioo lhioo
piico chungos nusl Lo, in uLsolulo vuluo, oguul lo oi snulloi lhun lho posilivo covuiiunco Lolwoon
poiioo ono uno poiioo lwo piico chungos, iosulling in un ovoiull ono-poiioo covuiiunco lhul is
posilivo.
Whon = : oilois fion j, lho covuiiuncos uio:
1[^1
1
^1
2
[
v=q
=
2(1 )(2j 1)(j
C
j)
j
C
(2 1) 1
0
1[^1
1
^1
8
[
v=q
=
2j
C
( 1)(j
C
j)(1 j
C
)(2 1)
2
(2j 1)
[j
C
(2 1) 1 [[j
C
(2 1) (1 )
2
[
< 0
1[^1
2
^1
8
[
v=q
=
4j
C
( 1)(j
C
j)(1 j
C
)(2 1)
2
(jj
C
j j
C
2jj
C
j)
[j
C
(2 1) 1 [
2
[j
C
(2 1) (1 )
2
[
< 0.
Now lol lho signul
8
huvo u piocision of : lhul oilois fion Lolh piocisions of j uno .
Iiocoooing us uLovo, lho covuiiuncos uio us follows.
1[^1
1
^1
2
[ =
2(1 )(2j 1)(j
C
j)
j
C
(2 1) 1
0
1[^1
1
^1
8
[ = c
2j
C
( 1)(j
C
j)(1 j
C
)(2: 1)
2
(2j 1)
[j
C
(2 1) 1 [[j
C
( : 1) (1 )(1 :)[
< 0
1[^1
2
^1
8
[ = c
4j
C
( 1)(j
C
j)(1 j
C
)(2: 1)
2
(jj
C
j j
C
2jj
C
j)
[j
C
(2 1) 1 [
2
[j
C
( : 1) (1 )(1 :)[
< 0
1[^1
8
^1
8
[ = c
2
4:j
C
(j
C
j)(1 j
C
)(1 :)(2: 1)
2
(j
C
1)
[j
C
( : 1) (1 )(1 :)[
2
0
1[^1
1
^1
8
[ = c
2:(j
C
j)(2j 1)(: 1)(j
C
(2 1) (1 ))
j
C
( : 1) (1 )(1 :)
< 0,
whoio
c =
( 1)
j
C
(: ) :( 1)
.
Conpuiing lo lho piovious cuso (whoio
8
huo lho suno piocision us lhul of
2
), lho c nulli-
plioi is ono whon : oguuls uno posilivo olhoiwiso
6
, whilo lho ionuinooi of lho oxpiossions foi
1[^1
1
^1
8
[ uno 1[^1
2
^1
8
[ conluin u fow ioplucononls of wilh : us conpuioo lo lho piovious
cuso whoio : is holo ul lho vuluo of .
1ho nugniluoo of 1[^1
2
^1
8
[ vuiios non-nonolonicully wilh . 1ho inpucl of u chungo in
lho piocision of
8
is clouioi.
c1[^1
2
^1
8
[
c:
=
4
2
j
C
( 1)
2
(j
C
j)(j
C
1)(2: 1)(jj
C
j j
C
2jj
C
j)
[j
C
(: ) :( 1)[
2
[j
C
( : 1) (1 )(1 :)[
2
< 0.
5o
1ho nunoiuloi is nogulivo. 1ho oononinuloi is nuxinizoo wilh iospocl lo : whon : is ul ils nuxinun
vuluo of ono, which yiolos u nogulivo oononinuloi uno u posilivo fiuclion, c.
4
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=
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1
7
As : iisos (lho piocision of
8
is inciousoo), 1[^1
2
^1
8
[ Loconos noio nogulivo (inciousos in
uLsolulo vuluo). As : ., lhis covuiiunco uppiouchos zoio. 1hus, whon lho socono noisy puLlic
signul is nol voiy infoinulivo, lhis nogulivo singlo-lug covuiiunco Loconos uiLiliuiily snull in
uLsolulo vuluo.
Conloonco inciousos whon
2
conlins
1
, Lul ils olocls uio niliguloo us
2
Loconos noio
infoinulivo. 1hus, un inciouso in lho piocision of
2
hus un unLiguous olocl on 1[^1
2
^1
8
[.
1his inciouso iosulls in u giouloi lilolihooo of ovoiconloonco occuiiing, yol ulso plucos giouloi,
iulionul, conloonco in
2
ilsolf, yioloing loss lovoiugo lo lho olocls of ovoiconloonco.
7
Lusoo
on sinululion, il uppouis lhul lho giouloi infoinulion iosulling fion highoi vuluos of lonos lo
ovoi-shuoow lho inciousoo lilolihooo of ovoiconloonco, iosulling in gonoiully lowoi uLsolulo vuluos
foi 1[^1
2
^1
8
[.
Luigoi vuluos of :, lho piocision of
8
, iosull in noio nogulivo vuluos of 1[^1
2
^1
8
[. In
lhis cuso, u noio infoinulivo socono noisy puLlic signul cun only pluco loss woighl on piovious
signuls uno iosull in u sliongoi coiioclion of lho piovious ovoiiouclion. 1hus, lho lnul ono-poiioo
covuiiunco is noio nogulivo us lho piocision of
8
iisos.
AondIx C: CovarIanco CaIcuIatIons for tho DynanIc ^odoI (SubsoctIon 4.2.1)
Sinco lho pioLuLilily j is un oxogonous conslunl, uno lho pioLuLilily lhul lho oulo 1 piico
novo wus posilivo is 1,2, Ly lho luw of iloiuloo oxpoclulions
cov(1
2
1
1
, 1
1
1
0
) = 1
-
[1[(1
2
1
1
)(1
1
1
0
)[
2
[[
=
/o
4
0
(o
2
0
o
2
c
)
2(o
2
0
o
2
C
)
2
(o
2
0
o
2
C
/)
0.
Sinco 1
8
= 0,
cov(1
8
1
2
, 1
2
1
1
) = 1
-
[1(1
8
1
2
)(1
2
1
1
) [
2
[
=
o
2
0
[/
2
o
2
0
/(o
2
c
o
2
C
)[
2(o
2
0
o
2
C
)(o
2
0
o
2
C
/)
2
. (10)
Fuilhoi,
cov(1
8
1
1
, 1
1
1
0
) = 1[(0 1
1
)1
1
[ =
o
4
0
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)
2
. (11)
1ho covuiiuncos in (10) uno (11) uio Lolh nogulivo.
Il is ousy lo show lhul
cov(1
8
1
8
, 1
8
1
2
) =
o
6
0
2
_
o
2
C
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)
2
[o
2
0
(o
2
C
o
2
j
) o
2
C
o
2
j
[

(o
2
C
/)(o
2
c
/ o
2
C
)
(o
2
0
o
2
C
/)
2
[o
2
0
(o
2
C
/ o
2
j
) (o
2
C
/)o
2
j
[
_
0, (12)
57
Al lho oxliono, u vuluo of oguul lo ono yiolos lho gioulosl chuncos of
2
conlining
l
yol iosulls in
zoio vuluos foi ull covuiiuncos us lho poifocl infoinulion of
2
onliioly ooloininos ull suLsoguonl piicos.
48
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c
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o
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t
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i
s

p
a
p
e
r
,

p
l
e
a
s
e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
cov(1
8
1

8
, 1
2
1
1
) =
/o
2
j
o
4
0
(/ o
2
c
o
2
C
)
2(o
2
C
/ o
2
0
)[(o
2
C
/)(o
2
0
o
2
j
) o
2
j
o
2
0
[
< 0 (18)
cov(1
8
1

8
, 1
1
1
0
) =
1
2
_
o
4
0
o
2
j
(o
2
c
o
2
C
)
(o
2
0
o
2
C
)[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[

o
4
0
o
2
j
(/ o
2
c
o
2
C
)
(o
2
0
o
2
C
)[(o
2
C
/)(o
2
0
o
2
j
) o
2
j
o
2
0
[
_
< 0 (14)
uno
cov(1

8
1
2
, 1
1
1
0
) =
1
2
_
o
6
0
o
2
C
(o
2
c
o
2
C
)
(o
2
0
o
2
j
)
2
[o
2
C
(o
2
0
o
2
j
) o
2
0
o
2
j
[

o
6
0
(o
2
C
/)(/ o
2
c
o
2
C
)
(o
2
0
o
2
C
/)[(o
2
C
/)(o
2
0
o
2
j
) o
2
j
o
2
0
[
_
< 0. (1)
Fuilhoinoio, sliuighlfoiwuio culcululions ulso inoiculo lhul
cov(1
8
1
2
, 1
2
1
1
) =
/o
6
0
(o
2
C
/)(o
2
c
/ o
2
C
)
2(o
2
C
o
2
0
/)
2
[o
2
j
o
2
0
(o
2
j
o
2
0
)(o
2
C
/)[
< 0. (16)
1ho lhioo singlo-lug conliguous covuiiuncos uio givon Ly (11), (12), uno (16). Fiisl, conpuio
lho covuiiuncos (10) uno (16). Il is ovioonl upon lhis conpuiison lhul lho sun of lhoso lwo
covuiiuncos will Lo nogulivo so long us o
2
j
is sulcionlly luigo sinco lho lulloi (nogulivo) covuiiunco
vuiios invoisoly wilh o
2
j
uno lho foinoi covuiiunco ooos nol oopono on o
2
j
. Sinco lho covuiiunco in
(12) is ulwuys posilivo, unconoilionul nononlun (oolnoo us lho sinplo uiilhnolic uvoiugo of lho
lhioo singlo covuiiuncos) will oLluin if o
2
j
is sulcionlly snull.
Noxl, conpuio (12) uno (16). As / goos lo zoio, lho covuiiunco in (16) goos lo zoio, whilo
lho covuiiunco in (12) ionuins sliiclly posilivo. 1hus, if / is sulcionlly snull, lho sun of lhoso
lwo covuiiuncos will Lo posilivo. Sinco (11) is ulwuys nonnogulivo, unconoilionul nononlun will
oLluin if / is sulcionlly snull.
AondIx D: Tho HoIatIon Hotvoon Long-Torn OvorroactIon and HovorsaIs
Foi lhoio lo oxisl long-loin ovoiiouclion lo ioluins us oiscussoo in DoLonol uno 1huloi (1087),
oi lo poifoinunco nousuios such us ouinings oi sulos us in Lulonishol, Shloifoi, uno Vishny (1004),
lhoio nusl Lo u iovoisul" ul sono hoiizon, nouning lhul, foi sono :, co(:
t
, :
tn
) < 0 in lho cuso
of ioluin iovoisuls, uno co(c
t
, :
tn
), whoio c
t
oonolos giowlh in un uccounling vuiiuLlo such us
ouinings oi sulos. 1his is u sinplo nulhonulicul iolulionship lhul is u iosull of lho linouiily of lho
covuiiunco opoiuloi, us wo show hoio.
Ioluin ovoiiouclion nouns lhul lho covuiiunco Lolwoon pusl long-hoiizon ioluins uno fuluio
long hoiizon ioluins is nogulivo.
S
co(:(t t, t), :(t, t t)) < 0
5S
Wo poifoin lhis ooiivulion ussuning oguul hoiizons foi pusl uno fuluio ioluins, Lul lho iosull
is vulio foi uny hoiizon of pusl uno fuluio ioluins.
49
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i
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c
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p
y

o
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t
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i
s

p
a
p
e
r
,

p
l
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e

v
i
s
i
t
:

h
t
t
p
:
/
/
s
s
r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
whoio hoio :(t t, t) oonolos lho log ioluin Lolwoon t t uno t, (=|oq(1
t>t
,1
t
)). Now, lol :
t
oonolo lho ono-poiioo log ioluin (=|oq(1
t>1
,1
t
)). 1hon
co(:(t t, t), :(t, t t)) = co
_
_
t

-=t>t1
:
-
,
tt

n=t1
:
n
_
_
=
t

-=t>t1
tt

n=t1
co(:
-
, :
n
)
=
2?t >1

n=1
:i:(:, 2t :) co(:
-
, :
-n
)
Sinco :i:(:, 2t :) is ulwuys nogulivo (foi lhis iungo of n), il follows lhul if co(:(t
t, t), :(t, t t)) < 0, lhon co(:
-
, :
-n
) < 0 foi sono vuluo(s) of :. In olhoi woios, lhoio nusl Lo
u ioluin iovoisul.
Asinilui ooiivulion shows lhul if lhoio is u nogulivo covuiiunco of pusl long-loinouiningssulos-
giowlh wilh fuluio long-hoiizon ioluins, lhon lhoio nusl Lo sono iovoisul in iosponso lo posilivo
uccounling giowlh in u guuiloi (..., co(c
t
, :
tn
) will Lo nogulivo foi sono : 0).
0
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,

p
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t
:

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p
:
/
/
s
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r
n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
Hoforoncos
ALuiLunoll, Joloiy S., 1001, Do unulysls` ouinings foiocusls incoipoiulo infoinulion in piioi slocl
piico chungos, Ju:nn| ] un.nj nnn 1nn. 14, 14716.
, uno Vicloi Loinuio, 1002, Anulysls` ovoiiouclion unooiiouclion lo ouinings infoinulion
us un oxplunulion foi unonulous slocl piico Lohuvioi, Ju:nn| ] 1.nnn 47, 11811207.
Aonuli, Anul, uno Iuul Ioiooioi, 1088, A lhooiy of inliuouy pulloins: Voluno uno piico vuii-
uLilily, 1.u ] 1.nnn.n| oun. 1, 840.
Ahlois, D., uno J. Lulonishol, 1088, A sluoy of ocononisls` consonsus foiocusls, Mnnnjnn
o.n 20, 1118112.
Alpoil, M., uno H Iuilu, 1082, A piogioss iopoil on lho liuining of pioLuLilily ussossois, in D.
Kuhnonun, I. Slovic, uno A. 1voisly, oo.: Junjnn unn: 1n:n.nj: 1u:.. nnn 1.n
(CunLiiogo Univoisily Iioss: CunLiiogo).
Anooison, 1honus W., 1084, n 1n:nu.n Mu|.n:.n on..n| nn|j. (John Wiloy
uno Sons: Now Yoil) socono oon.
LuiLoiis, Nicholus, Anoioi Shloifoi, uno IoLoil Vishny, 1006, A noool of invosloi sonlinonl,
Univoisily of Chicugo Minoo.
Luununn, A., I. DoLoi, uno G. 1honpson, 1001, Ovoiconloonco unong physiciuns uno nuisos:
1ho nicio-coiluinly, nucio-uncoiluinly phonononon, o.n| o.n nnn Mn..n 82, 167174.
Lon, D.J., 106, An oxpoiinonlul unulysis of solf-poisuusion, Ju:nn| ] 1r:.nnn| o.n|
1j||jj 1, 100218.
Lonos, A., 1006, Ovoiconloonl spocululois in cull nuilols: 1iuoo pulloins uno suivivul, Woiling
Iupoi, HLC, l-22.
Loinuio, Vicloi L., uno J. K. 1honus, 1080, Iosl-ouinings-unnouncononl oiifl: Doluyoo piico
iosponso oi iisl pioniun, Ju:nn| ] un.nj 1n:|, ou|nn 27, 148.
, 1000, Lvioonco lhul slocl piicos oo nol fully ioocl lho inpliculions of cuiionl ouinings
foi fuluio ouinings, Ju:nn| ] un.nj nnn 1nn. 18, 80840.
Ljoiiing, Junos H., Josof Lulonishol, uno 1hoo Voinuolon, 1088, Slocl piicos uno lnunciul
unulysls` ioconnonlulions, Ju:nn| ] 1.nnn 88, 187204.
Llucl, Fischoi, 1086, Noiso, Ju:nn| ] 1.nnn 41, 2048.
Liown, Slovon J., uno Ioloi F. Iopo, 1006, Iosl-ouinings unnouncononl oiifl, Woiling Iupoi,
Now Yoil Univoisily.
CuLullo, Joioi, uno Jozsof Sulovics, 1006, Ovoiconloonl spocululion wilh inpoifocl conpolilion,
Woiling Iupoi,Univoisilul Aulononu oo Luicolonu.
CunpLoll, John Y., uno John H. Cochiuno, 1004, Ly foico of huLil: A consunplion Lusoo oxplu-
nulion of uggiogulo slocl nuilol Lohuvioi, Univoisily of Chicugo Woiling Iupoi.
1
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,

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:

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p
:
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/
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n
.
c
o
m
/
a
b
s
t
r
a
c
t
=
2
0
1
7
CunpLoll, John Y., uno AlLoil S. Kylo, 1008, Snuil nonoy, noiso liuoing, uno slocl piico Lo-
huvioui, 1.u ] 1nn. oun. 60, 184.
Chun, Louis K.C., Nuiusinhun Joguooosh, uno Josof Lulonishol, 1006, Mononlun sliulogios,
Ju:nn| ] 1.nnn 1, 16811714.
Chopiu, Nuvin, Josof Lulonishol, uno Juy I. Iilloi, 1002, Mousuiing uLnoinul poifoinunco: Do
slocls ovoiioucl, Ju:nn| ] 1.nnn.n| 1nn. 81, 28268.
Chiislonson-Szulunsli, J., uno J. Lushyhouo, 1081, Ihysciuns` uso of pioLuLilislic infoinulion in u
ioul clinicul solling, Ju:nn| ] 1r:.nnn| 1j||jj: 1unnn 1:.n nnn 1:]:nnn
7, 02808.
Coopoi, A., C. Woo, uno W. DunlolLoig, 1088, Lnlioponouis` poicoivoo chuncos foi succoss,
Ju:nn| ] 1u.n 1nu:.nj 8, 07108.
Duniol, Konl D., 1006, 1ho powoi uno sizo of ussol piicing losls, Univoisily of Chicugo ninoo.
, Duvio Hiishloifoi, uno Avuniohui SuLiuhnunyun, 1007, Ovoiconloonco uno piooiclois
of socuiilios ioluins, Univoisily of Michigun ninoo.
Do Long, J.L., Anoioi Shloifoi, Luwionco Sunnois, uno I.J. Wulonunn, 1000u, Noiso liuooi iisl
in lnunciul nuilols, Ju:nn| ] 1|..n| 1nnj 08, 708788.
, 1000L, Iosilivo foooLucl invoslnonl sliulogios uno oosluLilizing iulionul spocululion,
Ju:nn| ] 1.nnn 4, 8780.
, 1001, 1ho suivivul of noiso liuoois in lnunciul nuilols, Ju:nn| ] 1u.n 64, 120.
DoLonol, Woinoi F. M., 1001, Whul oo ocononisls lnow uLoul lho slocl nuilol, Ju:nn| ]
1:]|. Mnnnjnn 17, 8401.
, uno Iichuio H. 1huloi, 108, Doos lho slocl nuilol ovoiioucl, Ju:nn| ] 1.nnn 40,
708808.
, 1087, Fuilhoi ovioonco on invosloi ovoiiouclion uno slocl nuilol sousonulily, Ju:nn| ]
1.nnn 42, 781.
, 1000, Do socuiily unulysls ovoiioucl, n:.nn 1nn. 1.u 80, 27.
, 100, Finunciul oocision-nuling in nuilols uno lins: A Lohuvioiul poispoclivo, in
IoLoil A. Juiiow, Voijsluv Mulsinovic, uno Williun 1. ZionLu, oo.: 1.nnn, 1nnnh| .n
C:n.n 1n:| nnn Mnnnjnn o.n, vol. 0 . chup. 18, pp. 88410 (Noilh Holluno:
Ansloioun).
DoChow, Iuliiciu M., uno Iichuio G. Sloun, 1007, Ioluins lo conliuiiun invoslnonl sliulogios:
1osls of nuivo oxpoclulions hypolhosos, Ju:nn| ] 1.nnn.n| 1nn. 4 foilhconing.
Dosui, Honung, uno Iion C. Juin, 1006, Long-iun connon slocl ioluins following slocl splils
uno slocl oivioonos, Woiling Iupoi, 1uluno Univoisily.
Lllon, Lowin. J., Muilin. J. GiuLoi, uno M. N. Gullolin, 1084, Iiofossionul oxpoclulions: Accu-
iucy uno oiugnosis of oiiois, Ju:nn| ] 1.nnn.n| nnn unn.n. nn|j. 10, 816.
2
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,

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.
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/
a
b
s
t
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a
c
t
=
2
0
1
7
Funu, Lugono F., uno Konnolh I. Fionch, 1088, Ioinunonl uno lonpoiuiy conpononls of slocl
piicos, Ju:nn| ] 1|..n| 1nnj 06, 246278.
, 1006, Mullifucloi oxplunulions of ussol piicing unonulios, Ju:nn| ] 1.nnn 1, 84.
Fischhol, L., I. Slovic, uno S. Lichlonsloin, 1077, Knowing wilh coiluinly: lho uppiopiiulonoss of
oxliono conloonco, Ju:nn| ] 1r:.nnn| 1j||jj 8, 264.
Fischol, L., 1082, Foi lhoso conoonnoo lo sluoy lho pusl: Houiislics uno Liusos in hinosighl, in
D. Kuhnonun, I. Slovic, uno A. 1voisly, oo.: Junjnn unn: 1n:n.nj: 1u:.. nnn
1.n (CunLiiogo Univoisily Iioss: CunLiiogo).
Fiool, Konnolh, uno Joloiy A. Fiunlol, 1080, Foiwuio oiscounl Lius: Is il un oxchungo iisl
pioniun, un::|j Ju:nn| ] 1nn. 104, 180161.
Gloslon, Luwionco I., uno Iuul I. Milgion, 108, Lio, usl uno liunsuclion piicos in u spociulisl
nuilol wilh holoiogonoously infoinoo liuoois, Ju:nn| ] 1.nnn.n| 1nn. 14, Muich.
Gonpois, Iuul, uno Josh Loinoi, 100, Vonluio cupilul oisliiLulions: Shoil-iun uno long-iun
iouclions, Huivuio Lusinoss School, woiling Iupoi.
Gioonwulo, A., 1080, 1ho loluliluiiun ogo: FuLiiculion uno iovision of poisonul hisloiy, n:.nn
1j||j. 8, 608618.
GiinLlull, Muil, Ionulo W. Musulis, uno Shoiioun 1ilnun, 1084, 1ho vuluulion olocls of slocl
splils uno slocl oivioonos, Ju:nn| ] 1.nnn.n| 1nn. 18, 07112.
Giossnun, Sunfoio J., uno Josoph L. Sliglilz, 1080, On lho inpossiLilily of infoinulionully olcionl
nuilols, n:.nn 1nn. 1.u 70, Juno.
Giolh, John C., WilLui G. Lowollon, Guiy C. SchuiLuun, uno Ionulo C. Louso, 1070, An unulysis
of Lioloiugo houso socuiilios ioconnonoulions, 1.nnn.n| nn|j` Ju:nn| pp. 8240.
Hiishloifoi, Duvio, Avuniohui SuLiuhnunyun, uno Shoiioun 1ilnun, 1004, Socuiily unulysis uno
liuoing pulloins whon sono invoslois iocoivo infoinulion Lofoio olhois, Ju:nn| ] 1.nnn 40,
1661608.
IlonLoiiy, Duvio, Josof Lulonishol, uno 1hoo Voinuolon, 100, Muilol unooiiouclion lo opon
nuilol shuio iopuichusos, Ju:nn| ] 1.nnn.n| 1nn. 80, 181208.
IlonLoiiy, Duvio, G. Iunlino, uno L. Slico, 1006, Whul oo slocl splils ioully signul, Hong Kong
Univoisily of Scionco uno 1ochnology Woiling Iupoi.
Juin, uno Onosh Kini, 1004, 1ho posl-issuo opoiuling poifoinunco of IIO lins, Ju:nn| ]
1.nnn 40, 16001726.
Joguooosh, Nuiusinhun, 1000, Lvioonco of piooicluLlo Lohuvioi of socuiily ioluins, Ju:nn| ]
1.nnn 4, 881808.
, uno Shoiioun 1ilnun, 1008, Ioluins lo Luying winnois uno solling losois: Inpliculions
foi slocl nuilol olcioncy, Ju:nn| ] 1.nnn 48, 601.
3
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t
=
2
0
1
7
Kuul, Guulun, uno M. Ninulonoiun, 1000, Iiico iovoisuls: Lio-usl oiiois oi nuilol ovoiiouclion,
Ju:nn| ] 1.nnn.n| 1nn. 28, 6708.
Kioo, J., 1070, 1ho ulilizulion of suLjoclivo pioLuLililios in pioouclion plunning, n 1j||j.n
84, 88847.
Kin, M. J., Chuilos I. Nolson, uno I. Sluilz, 1088, Moun iovoision in slocl piicos u iouppiuisul
of lho onpiiicul ovioonco, 1.u ] 1nn. oun. 8, 128.
Kloioon, Allun W., 1086, Lius in snull-sunplo losls of slocl piico iulionulily, Ju:nn| ] 1u.n
0.
Koiujczyl, IoLoil A., DoLoiuh J. Lucus, uno IoLoil L. McDonulo, 1001, 1ho olocl of infoinulion
iolousos on lho piicing uno lining of oguily issuos, 1.u ] 1.nnn.n| oun. 4, 68708.
Kylo, AlLoil, uno F. AlLoil Wung, 1006, Spocululion ouopoly wilh ugioononl lo oisugioo: Cun
ovoiconloonco suivivo lho nuilol losl, ColunLiu Univoisily Woiling Iupoi.
Kylo, AlLoil S., 108, Conlinuous uuclions uno insiooi liuoing, 1nn:.n 8, 181188.
Lu Ioilu, Iufuol, Josof Lulonishol, Anoioi Shloifoi, uno IoLoil W. Vishny, 100, Gooo nows
foi vuluo slocls: Fuilhoi ovioonco on nuilol olcioncy, Univoisily of Chicugo, CISI Woiling
Iupoi NunLoi 424.
Lulonishol, Josof, Anoioi Shloifoi, uno IoLoil W. Vishny, 1004, Conliuiiun invoslnonl, oxliupo-
lulion uno iisl, Ju:nn| ] 1.nnn 40, 141178.
Lulonishol, Josof, uno 1hoo Voinuolon, 1000, Anonulous piico Lohuvioi uiouno iopuichuso lonooi
olois, Ju:nn| ] 1.nnn 4, 477.
Lungoi, L. J., uno J. Iolh, 107, Houos I win luils il`s chunco: 1ho illusion of conliol us u
funclion of lho soguonco of oulconos in u puioly chunco lusl, Ju:nn| ] 1:nn|.j nnn o.n|
1j||jj 82, 010.
Loo, Chuilos, Anoioi Shloifoi, uno Iichuio 1huloi, 1001, Invoslois sonlinonl uno lho closoo-ono
funo puzzlo, Ju:nn| ] 1.nnn 46, 7100.
Lohnunn, Liuco N., 1000, Fuos, nuilingulos, uno nuilol olcioncy, un::|j Ju:nn| ] 1-
nn. 10, 128.
Lichlonsloin, S., L. Fischol, uno L. Ihillips, 1082, CuliLiulion of pioLuLililios: 1ho slulo of lho
uil lo 1080, in D. Kuhnonun, I. Slovic, uno A. 1voisly, oo.: Junjnn unn: 1n:n.nj:
1u:.. nnn 1.n (CunLiiogo Univoisily Iioss: CunLiiogo).
Lo, Anoiow W., uno A. Ciuig MucKinluy, 1000, Whon uio conliuiiun piolls ouo lo slocl nuilol
ovoiiouclion, 1.u ] 1.nnn.n| oun. 8, 1720.
Loughiun, 1in, uno Juy Iilloi, 100, 1ho now issuos puzzlo, J| Ju:nn| ] 1.nnn 0, 282.
, uno Kiisliun Iyogvisl, 1004, Iniliul puLlic oloiings: Inloinulionul insighls, 1n.] 1n.n
1.nnn Ju:nn| 2, 16100.
4
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Lucus, DoLoiuh J., uno IoLoil L. McDonulo, 1000, Lguily issuos uno slocl piico oynunics, Ju:nn|
] 1.nnn 4, 10101048.
MucKinluy, A. Ciuig, 100, Mullifucloi noools oo nol oxpluin ooviulions fion lho CAIM, Ju:nn|
] 1.nnn.n| 1nn. 88, 828.
Muish, 1oiiy A., uno IoLoil C. Moilon, 1086, Divioono vuiiuLilily uno vuiiunco Lounos losls foi
lho iulionulily of slocl nuilol piicos, n:.nn 1nn. 1.u 76, 488408.
Monoonhull, Iichuio, 1001, Lvioonco of possiLlo unooiwoighling of ouinings-ioluloo infoinulion,
Ju:nn| ] un.nj 1n:| 20, 170180.
Michuoly, Ioni, Iichuio H. 1huloi, uno Konl L. Wonucl, 100, Iiico iouclions lo oivioono inili-
ulions uno onissions: Ovoiiouclion oi oiifl, Ju:nn| ] 1.nnn 0, 78608.
Michuoly, Ioni, uno Konl Wonucl, 1006, Conicl of inloiosl uno lho ciooiLilily of unooiwiiloi
unulysl ioconnonoulions, woiling pupoi, Coinoll Univoisily.
Millolson, W., M. Iuilch, uno K. Shuh, 100, 1ho consoguoncos of going puLlic, Woiling Iupoi,
Lunoguisl Collogo of Lusinoss, U. Oiogon.
Milloi, uno Ioss, 107, Solf-soiving Lius in ulliiLulion of cuusulily: Fucl oi lclion, 1j||j.n|
1u||.n 82, 21822.
Myois, Slowuil C., uno Nicholus S. Mujluf, 1084, Coipoiulo lnuncing uno invoslnonl oocisions
whon lins huvo infoinulion lhul invoslois oo nol huvo, Ju:nn| ] 1.nnn.n| 1nn. 18,
Juno.
Noulo, M., uno M. Luzoinun, 1000, Cjn..n nnn 1n.nn|.j .n Aj.n.n (1ho Fioo Iioss:
Now Yoil).
Oooun, 1oiiunco, 100, Voluno, volulilily, piico uno pioll whon ull liuoois uio uLovo uvoiugo,
Univoisily of Culifoiniu, Loiloloy Woiling Iupoi.
Oslunp, S., 106, Ovoiconloonco in cuso sluoy juogononls, Ju:nn| ] Cnu|.nj 1j||jj 20,
26126.
Iuguno, Muico, FuLio Iunollu, uno Luigi Zingulos, 1006, Why oo conpunios go puLlic un
onpiiicul unulysis, CILI Discussion Iupoi No. 1882.
IoloiLu, Junos M., uno Luwionco H. Sunnois, 1088, Moun iovoision in slocl ioluins: Lvioonco
uno inpliculions, Ju:nn| ] 1.nnn.n| 1nn. 22, 270.
Iionooigusl, Cunico., uno Luis Slolo, 1006, Inpoluous youngslois uno juooo ololinois: An unulysis
of Lohuvioiul oocision-nuling iulos, Ju:nn| ] 1|..n| 1nnj 104, 1101184.
Iilloi, Juy I., 1001, lho long-iun poifoinunco of iniliul puLlic oloiings, Ju:nn| ] 1.nnn 46,
827.
Ioss, Slophon A., 1077, 1ho ooloininulion of lnunciul sliucluio - lho inconlivo signulling uppiouch,
1|| Ju:nn| ] 1nn. 8, 2841.

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Iozol, Michuol S., uno Mii A. Zunun, 1088, Muilol olcioncy uno insiooi liuoing: Now ovioonco,
Ju:nn| ] 1u.n 61, 244.
Iusso, J, uno I. Schoonuloi, 1002, Munuging ovoiconloonco, o|nn Mnnnjnn 1.u 88, 717.
Soyhun, H. Nojul, 1086, Insioois` piolls, cosls of liuoing, uno nuilol olcioncy, Ju:nn| ] 1.nnn-
.n| 1nn. 61, 180212.
, 1088, 1ho infoinulion conlonl of uggiogulo insiooi liuoing, Ju:nn| ] 1u.n 61, 124.
Shilloi, IoLoil J., 1081, Do slocl piicos novo loo nuch lo Lo jusliloo Ly suLsoguonl chungos in
oivioonos, n:.nn 1nn. 1.u 71, 421408.
, 1084, Slocl piicos uno sociul oynunics, 1:|.nj 1n: n 1nn. ..j 1.u
2, 47408.
, 1080, Mn:| 1|n.|.j (MI1 Iioss: CunLiiogo).
Spioss, D. Kulhoiino, uno John Alocl-Giuvos, 100, Unooipoifoinunco in long-iun slocl ioluins
following sousonoo oguily oloiings, Ju:nn| ] 1.nnn.n| 1nn. 88, 248268.
Sluol von Holsloin, C., 1072, IioLuLilislic foiocusling: An oxpoiinonl ioluloo lo lho slocl nuilol,
C:jnn.:n.nn| 1|n.: nnn 1unnn 1:]:nnn 8, 18018.
Sunnois, Luwionco H., 1086, Doos lho slocl nuilol iulionully ioocl funounonlul vuluos, Ju:-
nn| ] 1.nnn 41, 01601.
Svonson, O., 1081, Aio wo ull loss iisly uno noio slillful lhun oui followoiivois, n 1j||j.n
47, 148148.
Swuninulhun, Lhusluiun, 1006, 1ino-vuiying oxpocloo snull lin ioluins uno closoo-ono funo
oiscounls, 1.u ] 1.nnn.n| oun. 0, 84888.
1uyloi, S., uno J. Liown, 1088, Illusion uno woll-Loing: A sociul psychologicul poispoclivo on
nonlul houllh, 1j||j.n| 1u||.n 108, 108210.
1ooh, Siow Hong, Ivo Wolch, uno 1. J. Wong, 1006, Luinings nunugononl uno lho long-loin
nuilol poifoinunco of sousonoo oguily oloiings, Univoisily of Michigun ninoo.
1ooh, Siow Hong, 1. J. Wong, uno Gilu Iuo, 1006, Inconlivos uno oppoilunilios foi ouinings
nunugononl, Univoisily of Michigun ninoo.
Wugonuui, W., uno G. Koion, 1086, Doos lho oxpoil lnow lho ioliuLilily of piooiclions uno
conloonco iulions of oxpoils, in L. Hollnugol, G. Munoini, uno D. Wooos, oo.: 1n||.jn
1..n ou: .n 1: 1n.:nnn (Spiingoi: Loilin).
Wung, F. A., 100, Sliulogic liuoing, usynnoliic infoinulion uno holoiogonoous piioi Loliofs,
ColunLiu Univoisily Woiling Iupoi.
Wung, Jiung, 1008, A noool of inloilonpoiul ussol piicos unooi usynnoliic infoinulion, 1.u
] 1nn. oun. 60, 240282.
0
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Wonucl, Konl L., 1006, Do Lioloiugo unulysls` ioconnonoulions huvo invoslnonl vuluo, Ju:nn|
] 1.nnn 1, 187168.
Yulos, J. Fiunl, 1000, Junjnn nnn 1..n Mn|.nj (Iionlico Hull: Lnglowooo Clils, Now
Joisoy).