Investor Sentiment with Information Shock in the Stock Market

Chunpeng Yang and Huihui Wu

Emerging Markets Finance and Trade, 2021, vol. 57, issue 2, 510-524

Abstract: In this article, we develop an asset pricing model with investor sentiment and public information, in which there is a shock of public information on investor sentiment. We find that public information has a significant effect on asset price, and the impact of investor sentiment on asset price depends on the proportion of sentiment investors and the public information shock on investor sentiment; furthermore, the shock of public information on investor sentiment can significantly impact the asset price, price stability, and public information efficiency; more importantly, if there are sentiment investors in the market, there cannot be a market equilibrium in which price can fully reflect the public information. Our results highlight the combined effect of investor sentiment and public information on the asset price, the mechanism of public information shock on investor sentiment, and how the shock impacts the asset pricing.

Date: 2021
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DOI: 10.1080/1540496X.2019.1593136

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