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Pricing stocks with yardsticks and sentiments

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  • Sebast\ian Mart\inez Bustos
  • Jorgen Vitting Andersen
  • Michel Miniconi
  • Andrzej Nowak
  • Magdalena Roszczynska-Kurasinska
  • David Bree
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    Abstract

    Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit a market subject to huge price swings, and how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day? Here we introduce the idea that people use heuristics, or "rules of thumb", in terms of "yard sticks" from the performance of the other stocks in a stock index. The under- /over-performance with respect to such a yard stick then signifies a general negative/positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks. We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years.

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    File URL: http://arxiv.org/pdf/1109.6909
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    Bibliographic Info

    Paper provided by arXiv.org in its series Papers with number 1109.6909.

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    Date of creation: Sep 2011
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    Handle: RePEc:arx:papers:1109.6909

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    Web page: http://arxiv.org/

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