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A Behavioral Approach to Stock Pricing

Colorado College Working Paper No. 2010-01

8 Pages Posted: 6 Apr 2010  

Jayash Paudel

Colorado College

Judith A. Laux

Colorado College - Department of Economics and Business

Date Written: April 5, 2010

Abstract

Recent literature in behavioral finance has contradicted the notion of efficiency of markets. Greater emphasis on how psychological biases influence both the behavior of investors and asset prices has led to a strong debate among proponents of behavioral finance and neoclassical finance. This has created the need to study how psychology affects financial decisions in households, markets and organizations. This study conducts a pooled ordinary least squares (OLS) model using the fixed effects estimator to investigate the linkage between investor sentiment and stock prices for 35 firms belonging to three different industries over a time period of 56 years, from 1950 to 2005. The findings suggest that investor sentiment does not significantly affect the stock prices in this sample.

Keywords: Market Efficiency, Stochastic Discount Factor Model, Behavioral Finance, Investor Sentiment Function, Stock Prices

JEL Classification: G1, D1

Suggested Citation

Paudel, Jayash and Laux, Judith A., A Behavioral Approach to Stock Pricing (April 5, 2010). Colorado College Working Paper No. 2010-01. Available at SSRN: https://ssrn.com/abstract=1584727 or http://dx.doi.org/10.2139/ssrn.1584727

Jayash Paudel

Colorado College ( email )

14 East Cache La Poudre Street
Colorado Springs, CO 80903
United States

Judith A. Laux (Contact Author)

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States
7193896414 (Phone)
7193896927 (Fax)

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