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Sentiment trading, informed trading and dynamic asset pricing

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  • Li, Jinfang

Abstract

This paper investigates the investor trading behavior in a dynamic setting. We present a continuous trading sentiment asset pricing model under asymmetric information. In the model, the informed rational investor trades on information so that the information is factored into prices gradually, while the sentiment investor trades on sentiment as if it were information. We find that sentiment trading not only increases the measure of market liquidity, but also makes the market imperfect. Moreover, all information is incorporated into prices by the end of trading in the continuous trading equilibrium. In addition to providing a unified explanation to some anomalies such as underreaction, momentum effect, reversal effect and so on, the model generates several other distinctive implications.

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  • Li, Jinfang, 2019. "Sentiment trading, informed trading and dynamic asset pricing," The North American Journal of Economics and Finance, Elsevier, vol. 47(C), pages 210-222.
    • Handle: RePEc:eee:ecofin:v:47:y:2019:i:c:p:210-222
    DOI: 10.1016/j.najef.2018.11.015
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    Cited by:

    1. Li, Jinfang, 2022. "The sentiment pricing dynamics with short-term and long-term learning," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    2. Li, Jinfang, 2020. "The momentum and reversal effects of investor sentiment on stock prices," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Jinfang Li, 2021. "The term structure effects of individual stock investor sentiment on excess returns," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 1695-1705, April.
    4. Xie, Yutang & Peng, Huan & Feng, Ting, 2024. "Pricing stock index futures with sentiments," Finance Research Letters, Elsevier, vol. 61(C).

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    More about this item

    Keywords

    Investor sentiment; Continuous trading equilibrium; Informed trading; Sentiment trading; G12; G14;
    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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