Nan Hu, Jun Xie, Bin Gao, and Tiantian Luo. The Predictive Power of Availability Heuristic for Excess Market Return Based on ARFIMA Model. Dynamic Systems and Applications 29 (2020) No. 9, 2765 – 2795

https://doi.org/10.46719/dsa20202994

ABSTRACT.
This paper explores the impact of availability heuristic on investors’ decisions and stock prices and examine the existence of availability heuristic in Chinese stock market. From aspect of price reversal and irrational price movement, we construct two types of measures of availability heuristic, to predict excess market return in the future. For the long memory of measures and return, Monte Carol is applied to find out whether the slope coefficients are inaccurate and bootstrap sampling method and ARFIMA model are used to adjust the slope coefficients and testify the predictive ability of availability heuristic indicators. We find that measures constructed in this paper have powerful predictive ability to excess market return in next six months, which are negatively correlated with the return, stocks that have experienced a sharp decline in price, they are likely to have a larger positive fluctuation in the next six months. These results are stable under bootstrap method.

Keywords: Availability heuristic, Long memory, Behavioral factors, Stock return predictability, Price reversal.