Theories on under- and over-reaction in asset prices fall into three types: (1) they are respectively driven by different psychological factors; (2) they are driven by different types of investors; and (3) they reflect un-modeled risk. We design an asset market where information arrives...

Many argue that under- and over-reaction in asset prices are caused by inherently different factors. We design an asset market where information arrives sequentially over time to investigate the sources of these phenomena. We find that prices react insufficiently to news surprises and...