Science China Mathematics

, Volume 55, Issue 11, pp 2367-2378

First online:

A discussion of Hong-Stein model

  • Shuai WangAffiliated withSchool of Finance and Statistics, East China Normal University
  • , WeiAn ZhengAffiliated withSchool of Finance and Statistics, East China Normal University Email author 

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In this paper, we discuss a kind of behavioral asset pricing model, called Hong-Stein model. Although this model succeeded in explaining the momentum and reversal effects, we find it usually reaches two extremes: the absolute value of autocorrelation of return sequence is so large that the direction of returns could be easily forecasted, or the value is so small that the elements in return sequence are almost independent of each other. The empirical results show that these two extremes are not supported by the real market data.


under-reaction and overreaction Hong-Stein model return direction


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