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Bounded rationality, anchoring-and-adjustment sentiment, and asset pricing

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  • Liang, Hanchao
  • Yang, Chunpeng
  • Zhang, Rengui
  • Cai, Chuangqun

Abstract

This paper presents a framework that incorporates an investor’s limited attention and anchoring and adjustment sentiment and their joint effects on asset pricing, with endogenous cost of neglecting part of the dividends and the asymmetric rationality levels of investors. We find that the combined effect of the two bounded rationality factors is often embodied in the “loss”, and the retail investors are insensitive to market sentiment and forced to pay more cognitive loss. A higher level of investor rationality and bullish market sentiment will jointly increase demand and then prices, while the effects of different bounded rationality factors are asymmetric.

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  • Liang, Hanchao & Yang, Chunpeng & Zhang, Rengui & Cai, Chuangqun, 2017. "Bounded rationality, anchoring-and-adjustment sentiment, and asset pricing," The North American Journal of Economics and Finance, Elsevier, vol. 40(C), pages 85-102.
    • Handle: RePEc:eee:ecofin:v:40:y:2017:i:c:p:85-102
    DOI: 10.1016/j.najef.2017.02.001
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