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Multi-period sentiment asset pricing model with information

Jinfang Li

International Review of Economics & Finance, 2014, vol. 34, issue C, 118-130

Abstract: This paper presents a multi-period trading sentiment asset pricing model under asymmetric information. In the model, the rational investor trades on information so that the information is gradually incorporated into prices, whereas the sentiment investor trades on sentiment as if it were information. Moreover, the speed of information incorporated into price becomes faster and faster, while the speed of sentiment factored into price gets slower and slower over time. We find that the existence of sentiment investor makes financial market possible, but decreases market efficiency. The model also offers a partial explanation to the financial anomalies of short-run momentum and long-term reversal.

Keywords: Investor sentiment; Multi-period trading equilibrium; Momentum effect (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.iref.2014.07.006

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