Stochastic investor sentiment, crowdedness and deviation of asset prices from fundamentals

Liyun Zhou and Chunpeng Yang

Economic Modelling, 2019, vol. 79, issue C, 130-140

Abstract: This study constructs a theoretical model to address how stochastic investor sentiment affects investor's crowdedness, and how stochastic investor sentiment and crowdedness affect asset prices. An asset pricing model incorporating stochastic investor sentiment and crowdedness is developed, which can provide efficient explanations for the deviations of asset prices from fundamentals and the maverick risk of investors. This model indicates that the optimistic (pessimistic) investor sentiment and the long (short) crowdedness caused by optimistic (pessimistic) sentimental investors can push asset price above (below) fundamental value. Also, the sentimental investors who are wrong and alone would take the maverick risk. Our results are consistent with the idea that investor sentiment and investor behavior matter for the asset prices and the deviations of asset prices from fundamentals.

Keywords: Behavioral finance; Stochastic investor sentiment; Crowdedness; Deviations of asset prices from fundamentals; Maverick risk (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:79:y:2019:i:c:p:130-140

DOI: 10.1016/j.econmod.2018.10.008

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