ARBITRAGEUR BEHAVIOR IN SENTIMENT-DRIVEN ASSET-PRICING

Erdem Kilic and Oguzhan Gã–ksel
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Oguzhan Gã–ksel: Marmara University, Faculty of Economics, Department of Economics (English), Göztepe Campus, Istanbul, Turkey

Annals of Financial Economics (AFE), 2021, vol. 16, issue 03, 1-37

Abstract: This study aims to model arbitrageur behavior in a sentiment-driven capital asset-pricing model under the premise of reflecting a more detailed decomposition of investor types in the equity markets. We explore the behavior and the impact of arbitrageur behavior, particularly, on pricing and on key financial ratios. We observe that the prevalence of the arbitrageur counteracts the effects of unsophisticated investors, resulting in a lower volatility of the price–dividend ratio, lower predictive power of changes in consumption for future price changes and lower equity premium. Thus, the results of our research allow us to conjecture that the extrapolation bias in the prices is lowered.

Keywords: Asset pricing; sentiment; CAPM; arbitrage; extrapolation (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1142/S2010495221500159

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