Information asymmetry, sentiment interactions, and asset price

Xuetong Zhang and Weiguo Zhang

The North American Journal of Economics and Finance, 2023, vol. 67, issue C

Abstract: We develop an asset pricing model with sentiment interactions between institutional and individual investors under the condition of information asymmetry. Our model considers private information and investor sentiment, two imperfections in securities markets, and integrates them into a theoretical model to investigate the role of the interaction between information asymmetry and investor sentiment in asset pricing. We show that the joint effect of private information and investor sentiment deviate the price of risky assets and efficiently explains anomalies in the stock market. Investor sentiment changes the effect of information on the equilibrium price relative to a world where all investors are completely rational. Private information changes the effect of investor sentiment on the equilibrium price in comparison with a scenario with symmetric market information. In addition, the individual investors’ learning and the disclosure of information both allow private information to be better integrated into the price and simultaneously changes the effect of investor sentiment on the equilibrium price.

Keywords: Investor sentiment; Information asymmetry; Asset pricing; Institutional investor; Individual investor (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:67:y:2023:i:c:s1062940823000438

DOI: 10.1016/j.najef.2023.101920

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