Investor Sentiment and Financial Market Volatility

Hui-Chu Shu and Jung-Hsien Chang

Journal of Behavioral Finance, 2015, vol. 16, issue 3, 206-219

Abstract: Empirical studies have documented the influence of investor sentiment on financial markets, but the underlying economic mechanism remains unclear. This study links psychological research and a traditional asset-pricing model to investigate the influence of investor sentiment variations on financial markets. By relaxing the assumption of investor rationality, this investigation shows that a modified Lucas [1978] model can adequately interpret prominent financial market anomalies, such as high volatility, bubble and crash formation, and the relationships among investor sentiment, asset prices and expected returns.

Date: 2015
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DOI: 10.1080/15427560.2015.1064930

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