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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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    1. repec:bla:jfinan:v:53:y:1998:i:6:p:1839-1885 is not listed on IDEAS
    2. Schwert, G William, 1990. "Stock Returns and Real Activity: A Century of Evidence," Journal of Finance, American Finance Association, vol. 45(4), pages 1237-1257, September.
    3. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    4. Fama, Eugene F, 1990. "Stock Returns, Expected Returns, and Real Activity," Journal of Finance, American Finance Association, vol. 45(4), pages 1089-1108, September.
    5. Meir Statman & Steven Thorley & Keith Vorkink, 2006. "Investor Overconfidence and Trading Volume," The Review of Financial Studies, Society for Financial Studies, vol. 19(4), pages 1531-1565.
    6. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
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    Cited by:

    1. Bin Gao & Huanhuan Hao & Jun Xie, 2022. "Does retail investors beat institutional investors?——Explanation of game stop’s stock price anomalies," PLOS ONE, Public Library of Science, vol. 17(10), pages 1-19, October.

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