Pricing Stocks with Yardsticks and Sentiments

Jørgen Vitting Andersen ()
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Jørgen Vitting Andersen: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit from a market subject to huge price swings, and also how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day. Here we introduce the idea that people use heuristics, or "rules of thumb", in terms of "yard sticks" from the performance of the other stocks in a stock index. The under or over performance with respect to such a yard stick then signifies a general negative or positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks.We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years

Keywords: CAPM; dimensional analysis; Behavioural Finance; sentiments (search for similar items in EconPapers)
Date: 2011
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Published in Algorithmic Finance, 2011, Algorithmic Finance, 1 (2), pp.183-190. ⟨10.3233/AF-2011-013⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-01396611

DOI: 10.3233/AF-2011-013

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