Investor Sentiment, Behavioral Heterogeneity and Stock Market Dynamics

55 Pages Posted: 24 Jul 2019 Last revised: 23 Dec 2019

See all articles by Changtai Li

Changtai Li

Nanyang Technological University (NTU) - Division of Economics

Sook Rei Tan

Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Nick Ho

Nanyang Technological University (NTU) - Division of Economics

Wai-Mun Chia

Nanyang Technological University (NTU) - School of Humanities & Social Sciences

Date Written: May 30, 2019

Abstract

Recent empirical works corroborate importance of sentiment in asset pricing. We further propose that sentiment may not affect everyone in a homogeneous way. In this paper, we construct a sentiment indicator taking into consideration behavioral heterogeneity of interacting investors. From our model simulation, we find sentiment contributes to several financial anomalies such as fat tails and volatility clustering of returns. More importantly, investor sentiment could be a significant source of financial market volatility. Our model with sentiment is also able to replicate different types of crises. Our finding shows that severity of crisis intensifies with investors’ sentiment sensitivity.

Keywords: Investor sentiment, Social interaction, Heterogeneous beliefs, Regime switching, Financial crises

JEL Classification: C61, D84, G12

Suggested Citation

Li, Changtai and Tan, Sook Rei and Ho, Nick and Chia, Wai-Mun, Investor Sentiment, Behavioral Heterogeneity and Stock Market Dynamics (May 30, 2019). Available at SSRN: https://ssrn.com/abstract=3424623 or http://dx.doi.org/10.2139/ssrn.3424623

Changtai Li (Contact Author)

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Sook Rei Tan

Nanyang Technological University (NTU) - School of Humanities & Social Sciences ( email )

Blk S3.2-B2
Nanyang Avenue
Singapore, 639798
Singapore

Nick Ho

Nanyang Technological University (NTU) - Division of Economics ( email )

HSS 04-53, 14 Nanyang Drive
Singapore, 639798
Singapore

Wai-Mun Chia

Nanyang Technological University (NTU) - School of Humanities & Social Sciences ( email )

Blk S3.2-B2
Nanyang Avenue
Singapore, 639798
Singapore

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