Pricing Stocks with Yardsticks and Sentiments

9 Pages Posted: 1 Oct 2011 Last revised: 22 Oct 2012

Sebastian Martinez Bustos

Universidad de los Andes, Colombia, Department of Mathematics

Jorgen Vitting Andersen

CES, Université Paris 1 Panthéon-Sorbonne

Michel Miniconi

Laboratoire Jean-Alexandre Dieudonné

Andrzej Nowak

University of Warsaw - Institute for Social Studies

Magda Roszczynska-Kurasinska

University of Warsaw - Institute of Applied Social Sciences

David Bree

University of Manchester - School of Computer Science

Date Written: September 30, 2011

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 a market subject to huge price swings, and 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-over-performance with respect to such a yard stick then signifies a general negative/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.

Suggested Citation

Martinez Bustos, Sebastian and Vitting Andersen, Jorgen and Miniconi, Michel and Nowak, Andrzej and Roszczynska-Kurasinska, Magda and Bree, David, Pricing Stocks with Yardsticks and Sentiments (September 30, 2011). Algorithmic Finance (2012), 1:2, 183-190. Available at SSRN: https://ssrn.com/abstract=1936051 or http://dx.doi.org/10.2139/ssrn.1936051

Sebastian Martinez Bustos

Universidad de los Andes, Colombia, Department of Mathematics ( email )

Carrera Primera # 18A-12
Bogota, D.C. 110311
Colombia

Jorgen Vitting Andersen (Contact Author)

CES, Université Paris 1 Panthéon-Sorbonne ( email )

Maison des Sciences Economiques
106-112 Boulevard de l'Hôpital 75647 Paris Cedex
Paris, 75647
France

Michel Miniconi

Laboratoire Jean-Alexandre Dieudonné ( email )

Parc Valrose
Nice Cedex 2, 06108
France

Andrzej Nowak

University of Warsaw - Institute for Social Studies ( email )

Stawki 5/7
Warsaw, 00 183
Poland

Magda Roszczynska-Kurasinska

University of Warsaw - Institute of Applied Social Sciences ( email )

Warsaw
Poland

David Bree

University of Manchester - School of Computer Science ( email )

Manchester M13 9GH
United Kingdom

HOME PAGE: http://www.cs.man.ac.uk/~dbree/

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