Abstract: This paper constructs an investor behavior model to describe investors’ belief bias by using sticky expectation and overconfidence and explains some typical asset price anomalies by discussing the correlation of the asset return in the model. The research results show that the model can explain the momentum effect and reversal effect in the market, and the larger the stickiness coefficient is, the later the inversion occurs. The overconfidence coefficient has a non-monotonic effect on the reversal period. The short-term momentum effect of the asset prices is robust over the whole period. The model can also effectively explain other financial anomalies, such as post-event price drift in event study and lead-lag effect of stock returns in the same industry. Empirical results show that sticky expectations and overconfidence provide a good explanation for the momentum and reversal effects. Among them, the momentum effect is more significant in portfolios with a higher stickiness coefficient. In portfolios with the same degree of stickiness, stocks with a higher level of overconfidence show a more significant long-term reversal effect.

Key words: sticky expectation, overconfidence, momentum effect, reversal effect