Tema: Managing Overreaction During a Run
Presenta: Caio Machado (PUC)
This paper studies whether suspensions intended to provide a time-out for agents to digest incoming information attenuate runs, under the assumption that agents overreact to news and need time to properly process it. To do so, it embeds diagnostic expectations into a standard global game model of runs. Contrary to common wisdom, I show that during bad times, when bad public news arrives and/or investment returns are low, such policy actually amplifies runs, even in cases where almost all investors are receiving negative news and overreacting to it. During good times, the opposite result arises.
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