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Two-period trading sentiment asset pricing model with information

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Author Info

  • Yang, Chunpeng
  • Li, Jinfang
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    Abstract

    We present a dynamic asset pricing model with investor sentiment and information, which shows that the investor sentiment plays a systematic and important role in the asset prices and the information is gradually incorporated into prices. The model has an analytical solution to the sentiment equilibrium price. We find that sentiment trading quantity not only increases the market liquidity, but also causes the asset prices' overreaction if the intensity of sentiment demand is more than a constant value. Therefore, the continuing overreactions result in a short-term momentum and a long-term reversal. The model could offer a partial explanation to some financial anomalies such as price bubbles, high volatility, asset prices' overreaction and so on.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0264999313003787
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    Bibliographic Info

    Article provided by Elsevier in its journal Economic Modelling.

    Volume (Year): 36 (2014)
    Issue (Month): C ()
    Pages: 1-7

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    Handle: RePEc:eee:ecmode:v:36:y:2014:i:c:p:1-7

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    Web page: http://www.elsevier.com/locate/inca/30411

    Related research

    Keywords: Investor sentiment; Dynamic asset pricing; Overreaction;

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    1. Alok Kumar & Charles M.C. Lee, 2006. "Retail Investor Sentiment and Return Comovements," Journal of Finance, American Finance Association, vol. 61(5), pages 2451-2486, October.
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    Cited by:
    1. Lyudmila A. Glik & Oleg L. Kritski, 2014. "Finding informed traders in futures and their inderlying assets in intraday trading," Papers 1402.6583, arXiv.org.

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