Feedback Trading, Investor Sentiment and the Volatility Puzzle: An Infinite Theoretical Framework

Cong Chen, Changsheng Hu and Liang Wu ()
Additional contact information
Cong Chen: School of Finance and Economics, Jiangsu University, Zhenjiang 212013, China
Changsheng Hu: Economics and Management School, Wuhan University, Wuhan 430072, China
Liang Wu: Economics and Management School, Wuhan University, Wuhan 430072, China

Mathematics, 2023, vol. 11, issue 14, 1-15

Abstract: This article constructs a behavioral financial model that provides feedback on both historical prices and company fundamentals without considering asset liquidation to discuss the long-term impact of investor sentiment and feedback trading on asset price fluctuations. The research conclusion shows that the abnormal volatility of asset prices is captured by the value effect, the cognitive bias effect, the sentiment shock effect, and the trading inductive effect. The value effect is the volatility of asset prices that is completely determined by fundamental factors; the higher the degree of cyclical fluctuations in fundamental factors, the higher the volatility of prices. The bias effect refers to investors’ misreading of basic information and trends in asset prices; the greater the instability of emotional shocks, the greater the abnormal volatility of asset prices. The trading inductive effect is also called the Keynes effect, which reflects the role played by rational traders.

Keywords: feedback trading; investor sentiment; the abnormal volatility of asset prices (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2227-7390/11/14/3148/pdf (application/pdf)
https://www.mdpi.com/2227-7390/11/14/3148/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jmathe:v:11:y:2023:i:14:p:3148-:d:1195816

Access Statistics for this article

Mathematics is currently edited by Ms. Emma He

More articles in Mathematics from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().