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

Hanchao Liang, Chunpeng Yang, Rengui Zhang and Chuangqun Cai

The North American Journal of Economics and Finance, 2017, vol. 40, issue C, 85-102

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.

Keywords: Bounded rationality; Limited attention; Anchoring and adjustment; Sentiment; Asset pricing (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:ecofin:v:40:y:2017:i:c:p:85-102