Rational Investor Sentiment

Zurich IEER Working Paper No. 126

68 Pages Posted: 13 Sep 2002

See all articles by Anke Gerber

Anke Gerber

Universität Hamburg

Bodo Vogt

Bielefeld University - Center for Mathematical Economics

Thorsten Hens

University of Zurich - Department of Banking and Finance; Norwegian School of Economics and Business Administration (NHH); Swiss Finance Institute

Date Written: December 2002

Abstract

We explain excess volatility, short-term momentum and long-term reversal of asset prices by a repeated game version of Keynes‚ beauty contest. In every period the players can either place a buy or sell order on the asset market. The actual price movement is determined by average market orders and noise. It is common knowledge that the noise process is an exogenous random walk. Our model explains short-term momentum and long-term reversal of stock prices by unpredictable switches in the coordination of the players. When the players are coordinated on buying (selling), we say the market is in the up (down) mood. In this model changing investor sentiment is a rational strategy as it leads to a Nash equilibrium of the coordination game. We give experimental evidence in support of our claims. finance

Keywords: Experimental asset markets, investor sentiment, behavioral

JEL Classification: G12, C91

Suggested Citation

Gerber, Anke and Vogt, Bodo and Hens, Thorsten, Rational Investor Sentiment (December 2002). Zurich IEER Working Paper No. 126. Available at SSRN: https://ssrn.com/abstract=326802 or http://dx.doi.org/10.2139/ssrn.326802

Anke Gerber (Contact Author)

Universität Hamburg ( email )

Faculty of Business, Economics and Social Sciences
Von-Melle-Park 5
Hamburg, 20146
Germany

Bodo Vogt

Bielefeld University - Center for Mathematical Economics ( email )

Postfach 10 01 31
Bielefeld, D-33501
Germany

Thorsten Hens

University of Zurich - Department of Banking and Finance ( email )

Plattenstrasse 32
Zurich, 8032
Switzerland
+41-44 634 37 06 (Phone)

Norwegian School of Economics and Business Administration (NHH)

Helleveien 30
Bergen, 5045
Norway

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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