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Stochastic investor sentiment, crowdedness and deviation of asset prices from fundamentals

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  • Zhou, Liyun
  • Yang, Chunpeng

Abstract

This study constructs a theoretical model to address how stochastic investor sentiment affects investor's crowdedness, and how stochastic investor sentiment and crowdedness affect asset prices. An asset pricing model incorporating stochastic investor sentiment and crowdedness is developed, which can provide efficient explanations for the deviations of asset prices from fundamentals and the maverick risk of investors. This model indicates that the optimistic (pessimistic) investor sentiment and the long (short) crowdedness caused by optimistic (pessimistic) sentimental investors can push asset price above (below) fundamental value. Also, the sentimental investors who are wrong and alone would take the maverick risk. Our results are consistent with the idea that investor sentiment and investor behavior matter for the asset prices and the deviations of asset prices from fundamentals.

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  • Zhou, Liyun & Yang, Chunpeng, 2019. "Stochastic investor sentiment, crowdedness and deviation of asset prices from fundamentals," Economic Modelling, Elsevier, vol. 79(C), pages 130-140.
    • Handle: RePEc:eee:ecmode:v:79:y:2019:i:c:p:130-140
    DOI: 10.1016/j.econmod.2018.10.008
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    Cited by:

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    More about this item

    Keywords

    Behavioral finance; Stochastic investor sentiment; Crowdedness; Deviations of asset prices from fundamentals; Maverick risk;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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