Expectation Formation in Financial Markets: Heterogeneity and Sentiment

26 Pages Posted: 27 Nov 2019

See all articles by Bart Frijns

Bart Frijns

Auckland University of Technology - Faculty of Business & Law

Thanh D. Huynh

Monash University - Department of Banking and Finance

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute

Date Written: November 15, 2019

Abstract

We set up an endowment based asset pricing model in which agents have heterogeneous expectations about the future price level. Expectations are a function of fundamentals, trends, and sentiment. Agents are allowed to switch between expectation formation functions based on past performance as well as sentiment. Estimation results on the S&P500 reveal that there is heterogeneity between agents, with substantial switching between groups. We find that sentiment has a direct effect on expectations. Specifically, heterogeneity is increasing in sentiment, and sentiment reduces the frequency of switching between functions

Suggested Citation

Frijns, Bart and Huynh, Thanh Duc and Zwinkels, Remco C.J., Expectation Formation in Financial Markets: Heterogeneity and Sentiment (November 15, 2019). Available at SSRN: https://ssrn.com/abstract=3487369 or http://dx.doi.org/10.2139/ssrn.3487369

Bart Frijns

Auckland University of Technology - Faculty of Business & Law ( email )

3 Wakefield Street
Private Bag 92006
Auckland Central 1020
New Zealand

Thanh Duc Huynh

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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