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The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

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  • Jun Xie
  • Wenqian Xia
  • Bin Gao

Abstract

The sustainability of stock price fluctuations indicated by many empirical studies hardly reconciles with the existing models in standard financial theories. This paper proposes a recursive dynamic asset pricing model based on the comprehensive impact of the sentiment investor, the information trader and the noise trader. The dynamic process of the asset price is characterized and a numerical simulation of the model is provided. The model captures the features of the actual stock price that are consistent with the empirical evidence on the sustainability of stock price fluctuations. It also offers a partial explanation for other financial anomalies, for example, asset price’s overreaction, asset bubble and the financial crisis. The major finding is that investor sentiment is the key factor to understand the sustainability of stock price fluctuations.

Suggested Citation

  • Jun Xie & Wenqian Xia & Bin Gao, 2021. "The sustainability of stock price fluctuations: Explanation from a recursive dynamic model," PLOS ONE, Public Library of Science, vol. 16(8), pages 1-16, August.
    • Handle: RePEc:plo:pone00:0255081
    DOI: 10.1371/journal.pone.0255081
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    References listed on IDEAS

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