Dynamic asset pricing model with heterogeneous sentiments |
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| Institution: | 1. Department of Applied Economics, Fo Guang University, Yilan, Taiwan;2. Department of Economics, Feng Chia University, Taichung, Taiwan;3. Department of Leisure Management, Tungnan University, Taipei, Taiwan;1. Department of Economics, Yokohama National University, 79-3 Tokiwadai, Hodogaya-ku, Yokohama 240-8501, Japan;2. Faculty of Economics, Fukuoka University, 8-19-1 Nanakuma, Jonan-ku, Fukuoka 814-0180, Japan;1. Korea University, Republic of Korea;2. University of Exeter, United Kingdom |
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| Abstract: | The systematic and important role of investor sentiment has been supported by some recent empirical and theoretical literatures. In this paper, we present a dynamic asset pricing model with heterogeneous sentiments and we find that the equilibrium stock price is the wealth-share-weighted average of the stock prices that would prevail in an economy with one sentiment investor only. Moreover, heterogeneous sentiments induce fluctuations in the wealth distribution, which increases stock return volatility and induces mean reversion in stock returns. The model offers a partial explanation for the financial anomaly of mean reversion. |
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