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Sentiment trading, informed trading and dynamic asset pricing

Jinfang Li

The North American Journal of Economics and Finance, 2019, vol. 47, issue C, 210-222

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.

Keywords: Investor sentiment; Continuous trading equilibrium; Informed trading; Sentiment trading; G12; G14 (search for similar items in EconPapers)
Date: 2019
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