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Quantitative Finance and Economics

2022, Volume 6, Issue 1: 54-82. doi: 10.3934/QFE.2022003
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Research article

Availability heuristic and reversals following large stock price changes: evidence from the FTSE 100

  • 1.
    School of Economics and Management, University of Porto, Porto, Portugal
  • 2.
    Department of Economics and Management, Portucalense University, REMIT, IJP (Portucalense Institute for Legal Research), Porto, Portugal
  • Received: 02 November 2021 Revised: 14 December 2021 Accepted: 10 February 2022 Published: 15 February 2022

  • JEL Codes: G14, G41

  • This paper examines if investors exhibited evidence of the availability heuristic in their investment decisions when significant price changes occurred in the British stock market during the 2010–2018 period. We raise the hypothesis that if a significant stock price move takes place on a day when the stock market index also undergoes a significant change (either positive or negative), then the magnitude of that shock may be increased by the availability of positive investment or negative outcomes. We applied three different proxies for large stock price changes which yielded a robust sample of events for this study. We found no significant evidence of the availability heuristic. In addition, we also found no significant evidence of price overreaction for both price decreases and increases. Inversely, we found robust results that suggest randomness in the behavior of stock prices in this period, thus supporting the efficiency of financial markets and opposing the results from similar studies carried out in the United States.

    Citation: Diogo Matos, Luís Pacheco, Júlio Lobão. Availability heuristic and reversals following large stock price changes: evidence from the FTSE 100[J]. Quantitative Finance and Economics, 2022, 6(1): 54-82. doi: 10.3934/QFE.2022003

    Related Papers:

  • This paper examines if investors exhibited evidence of the availability heuristic in their investment decisions when significant price changes occurred in the British stock market during the 2010–2018 period. We raise the hypothesis that if a significant stock price move takes place on a day when the stock market index also undergoes a significant change (either positive or negative), then the magnitude of that shock may be increased by the availability of positive investment or negative outcomes. We applied three different proxies for large stock price changes which yielded a robust sample of events for this study. We found no significant evidence of the availability heuristic. In addition, we also found no significant evidence of price overreaction for both price decreases and increases. Inversely, we found robust results that suggest randomness in the behavior of stock prices in this period, thus supporting the efficiency of financial markets and opposing the results from similar studies carried out in the United States.


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