Information asymmetry,sentiment interactions,and asset price

We develop an asset pricing model with sentiment interactions between institutional and individual investors under the condition of information asymmetry. Our model considers private information and investor sentiment, two imperfections in securities markets, and integrates them into a theoretical model to investigate the role of the interaction between information asymmetry and investor sentiment in asset pricing. We show that the joint effect of private information and investor sentiment deviate the price of risky assets and efficiently explains anomalies in the stock market. Investor sentiment changes the effect of information on the equilibrium price relative to a world where all investors are completely rational. Private information changes the effect of investor sentiment on the equilibrium price in comparison with a scenario with symmetric market information. In addition, the individual investors’ learning and the disclosure of information both allow private information to be better integrated into the price and simultaneously changes the effect of investor sentiment on the equilibrium price.     

Heterogenous beliefs with sentiments and asset pricing

We present a dynamic equilibrium model with two irrational investors: an extrapolator and a contrarian, whose beliefs regarding the growth rate of dividend stream are biased by their sentiments. The key contribution is to connect two disagreements with the degree of irrationality of investors and to provide novel insights into the predictability of stock return. We show that the higher level of sentiment disagreement is, the more stock price is overvalued. However, the future stock price will decline because the extrapolator’s sentiment will cool down over time. Therefore, the sentiment disagreement negatively predicts future return. At the meanwhile, our model not only shows that the survey expectations about cashflows increase the variations in asset price and dampen the corresponding volatility, but also helps to explain the mixed results about the relationship between the investors’ belief dispersions and stock return predictability.     

Disagreement with procyclical beliefs and asset pricing

We consider a pure exchange economy with incomplete information in which the expected growth rate of endowment is unobservable. The economy is populated by two investors, one is rational, but the other irrationally believes that the dynamics of endowment exhibit procyclical feature. Such different opinions about the dynamics of endowment process produce persistent disagreement between the investors. We show that model-implied riskfree rate is procyclical. Further, the procyclical beliefs not only explain the excess volatility puzzle, but also help to explain the mixed results about the relationship between the investors’ belief dispersions and stock return. Moreover, we uncover that the rational investor prefers to short stock positions in good times as the degree of the other investor’s irrationality increasing.     

The saving,human wealth and asset pricing nexus: Evidence from around the world

The present study examines the dynamics of the saving, human wealth and asset pricing nexus across developed and emerging economies. We introduce two equilibrium asset pricing models in an intertemporal capital asset pricing framework, including the priced factors human wealth and market portfolio in the first framework and the saving and market portfolio in the second framework. Both asset pricing frameworks consist of two-factor, four-factor and five-factor asset pricing models. We control for size and value factors in the four-factor model and size, value and momentum factors in the five-factor model. The IV-GMM estimation and GRS test results indicate that human wealth and market portfolio for the first framework and saving and market portfolio in the second framework are primary priced factors in explaining the average returns for developed economies and the aggregate level. On the contrary, both frameworks fail to yield significant results explaining the average returns for emerging economies.     

The sentiment pricing dynamics with short-term and long-term learning

Combining the behavioral characteristics of rational uninformed investors with learning information behavior of sentiment investors, this paper establishes a mathematical model about the impact of learning information behavior on the investor's transaction and asset equilibrium price under asymmetric information. Research shows that when rational uninformed investors learn information in the short term, on the one hand, they choose to bet against sentiment investors, thus reducing the influence of sentiment; on the other hand, they occasionally mistake sentiment for information to chase sentiment investors, then amplifying sentiment shocks. Furthermore, sentiment investors can also gain valuable information indirectly by observing the price in the long term. When sentiment investors learn information in the long term, the price fluctuations caused by sentiment and information, informativeness of the price system and market efficiency are no longer dependent on the quality of information.     

A much robust and updated evidences of the alternative real-estate based asset pricing

To response Harvey, Liu and Zhu’s and Gospodinov, Kan and Robotti’s criticism for an empirical study, we develop an alternative real-estate based model in asset pricing for an updated robustness. We make an innovation for the perspective of practitioners: the real-estate pricing factor is an alternative excess return of real estate portfolio. The results suggest that an updated and much robust role of the real-estate based asset pricing model: for example, the t-statistic of the real-estate pricing factor is higher than 3.00, suggesting that one is not derived from a data mining strategy. Moreover, we examine the performance of our alternative real-estate based model in a series of various portfolios (sorted in some vital anomalies); eventually, the results statistically support the real-estate based model.     

Heterogeneous beliefs with herding behaviors and asset pricing in two goods world

We construct a incomplete information equilibrium model with heterogeneous beliefs and herding behaviors to identify their joint effects on the dynamics of asset prices. Herding behaviors make investors revise some of their estimations about expected growth rates of goods streams toward to the other one’s by a manner of weighted average of their own forecast and the other’s. As we expected, herding behaviors generate influences on the Radon Nikodym derivative, that is so-called “sentiment” as in Dumas et al. (2009), and in turn not only impact the dynamics of asset prices but also generate influences on investors’ survivals. We also show that introducing heterogeneous beliefs with herding behaviors permits to explain both the Backus–Smith puzzle and the mixed results about the influences of herding behaviors on asset prices. Moreover, we uncover that herding behaviors have positive influences on stocks’ risk premiums.     

Disagreements with noisy signals and asset pricing

We consider a Lucas-type exchange economy with two trees and two investors to analyze the effects of heterogeneous beliefs and signal quality on stock market equilibrium. Our model has the following implications. There are spillover effects, in that the investors’ heterogeneous beliefs and signal quality related to one stock not only affect its own price and pricing moments, but also affect those of the other. Contrary to the conventional wisdom, we show that the volatility of one stock decreases with both its own and the other stock’s disagreements. Additionally, we reveal a negative correlation between the stocks, which decreases as the investors’ dispersions raise but increases as the discrepancy in signal quality reduces. We also show that heterogeneous beliefs and signal quality impact stock market beta mainly through scale and volatility effects, respectively. Furthermore, our findings suggest that both heterogeneous beliefs and signal quality have significant influences on the investors’ optimal portfolio plans.     

Rational asset pricing bubbles and debt constraints

Rational price bubble arises when the price of an asset exceeds the asset’s fundamental value, that is, the present value of future dividend payments. The important result of Santos and Woodford (1997) says that price bubbles cannot exist in equilibrium in the standard dynamic asset pricing model with rational agents facing borrowing constraints as long as assets are in strictly positive supply and the present value of total future resources is finite. This paper explores the possibility of asset price bubbles under endogenous debt constraints induced by limited enforcement of debt repayment. Equilibria with endogenous debt constraints are prone to have infinite present value of total resources. We show that asset price bubbles are likely to exist in such equilibria. Further, we demonstrate that there always exist equilibria with price bubbles on assets in zero supply.     

Optimal consumption under uncertainty,liquidity constraints,and bounded rationality

I study how boundedly rational agents can learn a “good” solution to an infinite horizon optimal consumption problem under uncertainty and liquidity constraints. Using an empirically plausible theory of learning I propose a class of adaptive learning algorithms that agents might use to choose a consumption rule. I show that the algorithm always has a globally asymptotically stable consumption rule, which is optimal. Additionally, I present extensions of the model to finite horizon settings, where agents have finite lives and life-cycle income patterns. This provides a simple and parsimonious model of consumption for large agent based models.     

Individual stock crowded trades,individual stock investor sentiment and excess returns

Recent behavioral asset pricing models and the popular press suggest that investors may follow similar strategies resulting in crowded equity positions to push prices further away from fundamentals. This paper develops a new approach to measure individual stock crowded trades, and further investigates the joint effects of individual stock crowded trades and individual stock investor sentiment on excess returns. Specifically, our results show that the combined effect of individual stock crowded trades and individual stock investor sentiment on excess returns is positive and significant, which reveals the importance of “anomaly factors” in asset pricing. Furthermore, our results suggest that increasing individual stock buyer-initiated crowded trades will increase excess returns simultaneously; however, increasing individual stock seller-initiated crowded trades will decrease excess returns simultaneously. Collectively, our results highlight the importance of individual stock crowded trades and individual stock investor sentiment on the formation of stock prices.     

Asset pricing with loss aversion

The use of standard preferences for asset pricing has not been very successful in matching asset price characteristics, such as the risk-free interest rate, equity premium and the Sharpe ratio, to time series data. Behavioral finance has recently proposed more realistic preferences such as those with loss aversion. Research is starting to explore the implications of behaviorally founded preferences for asset price characteristics. Encouraged by some studies of Benartzi and Thaler [1995. Myopic loss aversion and the equity premium puzzle. The Quarterly Journal of Economics 110 (1), 73–92] and Barberis et al. [2001. Prospect theory and asset prices. Quarterly Journal of Economics CXVI (1), 1–53] we study asset pricing with loss aversion in a production economy. Here, we employ a stochastic growth model and use a stochastic version of a dynamic programming method with an adaptive grid scheme to compute the above mentioned asset price characteristics of a model with loss aversion in preferences. As our results show using loss aversion we get considerably better results than one usually obtains from pure consumption-based asset pricing models including the habit formation variant.     

Equilibrium asset pricing with Epstein-Zin and loss-averse investors

We study multi-period equilibrium asset pricing in an economy with Epstein-Zin (EZ-) agents whose preferences for consumption are represented by recursive utility and with loss averse (LA-) agents who derive additional utility of gains and losses and are averse to losses. We propose an equilibrium gain-loss ratio for stocks and show that the LA-agents are more (less) risk averse than the EZ-agents if their degree of loss aversion is higher (lower) than this ratio. When all the agents have unitary relative risk aversion degree and elasticity of intertemporal substitution, we prove the existence and uniqueness of the equilibrium and the market dominance of the EZ-agents in the long run. Finally, we extend our results to the case in which the LA-agents use probability weighting in their evaluation of gains and losses.     

Asset pricing for inefficient markets: Evidence from China and India

Over last four decades, evidence of market inefficiencies has been widely documented by several scholars for all major stock markets in the globe. Chinese and Indian markets are not exempt. Inefficiencies in these markets are described by many authors as roots of all mispricing. Mispricing might be the outcome of application of familiar asset pricing models which may mislead an investor into adopting inappropriate policies for his new investments or for reallocating his old investments. In an alternative approach, we propose a transformation on original market returns in the objective of relaxing the strong assumption of market efficiency behind application of an asset pricing model. This modification will widen the scope of rational models on asset pricing ranging from an efficient to an inefficient market.     

How money illusions and heterogeneous beliefs affect asset prices

We develop a dynamic asset pricing model with two investors with money illusions and heterogeneous beliefs about some aspects of the economy. The model is tractable and delivers closed forms for all equilibrium quantities. The study shows that money illusion leads the nominal shock risk to generate spillover effects on the real side of the economy and affects all equilibrium quantities, even without inflation disagreement. We find that bond yields increase, but the stock price decreases, as money illusion increases. Bond yield and stock price volatilities increase with fundamental disagreement, while the latter decreases with inflation disagreement. We also discover that the stock risk premium is inverse-U shaped as inflation disagreement increases. Moreover, we find that the optimistic investor holds positions in real bonds and stocks, and shorts the nominal bond to hedge against the risk of market changes, which is in line with the pessimistic investor’s beliefs.     

Identification and inference in two-pass asset pricing models

We introduce a framework that robustifies two-pass Fama–MacBeth regressions, in the sense that confidence regions for the ex post price of risk can be derived reliably even with weak identification. This region can be unbounded, if risk price is hard to identify, empty, if the model lacks fit, and bounded otherwise. Our framework thus provides automatic weak-identification and lack-of-fit warnings, and informative model rejections. Empirically relevant simulations document attractive size and power properties. Empirical applications with well known models and data sets illustrate practical usefulness and the potential value of additional cross-sectional information.     

The effect of market sentiment and information asymmetry on option pricing

This work addresses the impact of imperfections, such as information asymmetry and market sentiment, on the performance of option pricing models. More precisely, this work compares the option pricing model of Black and Scholes and the same model in the presence of imperfections. This study is based on S&P 500 options that cover the period between 17/03/2000 and 14/06/2013. The achieved results show that, in general, in the presence of imperfections, the model is more effective than the Black and Scholes model. This research appears to be promising for the incorporation of imperfections into the assessment of options.     

Cross-sectional implications of dynamic asset pricing with stochastic volatility and ambiguity aversion

Building on recent research that highlights the importance of macroeconomic volatility and ambiguity aversion in explaining the dynamics of stock returns, in this paper we propose a dynamic asset pricing model that simultaneously accounts for stochastic macroeconomic volatility and ambiguity, assuming that investors deal with uncertainty about the mechanics of macroeconomic fluctuations using first-release consumption and revisions to aggregate consumption on vintage data. Our results show that the proposed model captures a large fraction of the cross-sectional variation of excess returns for a wide range of market anomaly portfolios. Furthermore, while the price of risk for ambiguity is positive and significant for the vast majority of assets under study, macroeconomic volatility yields ambiguous outcomes, although it significantly increases the explanatory power of the model for specific assets. Our results suggest that macroeconomic volatility and ambiguity complement each other in explaining the cross-sectional behavior of stock returns.     

Hazard rate,stochastic choice and consideration sets

Manzini and Mariotti (2014) define the menu-independent random consideration set rule, where the decision maker considers each alternative with a menu-independent probability known as the attention function. We relax the assumption of menu-independence and allow for any restriction to be imposed on the attention function. We show that there is an equivalence between the attention function and the hazard rate. This equivalence is used to characterize the menu dependent random consideration set rules that correspond to (i) specific conditions on the probability rule, and (ii) different stochastic choice models from the literature.