Expectation Formation in Financial Markets: Heterogeneity and Sentiment

26 Pages Posted: 27 Nov 2019

See all articles by Bart Frijns

Bart Frijns

Open University of the Netherlands - School of Management

Thanh Huynh

Monash University - Department of Banking and Finance; Cbus Super Fund

Remco C. J. Zwinkels

VU University Amsterdam - Department of Finance and Financial Sector Management

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 D. 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

Open University of the Netherlands - School of Management ( email )

Valkenburgerweg 177
Heerlen, NL-6401DL
Netherlands

Thanh D. Huynh

Monash University - Department of Banking and Finance ( email )

Melbourne
Australia

Cbus Super Fund ( email )

130 Lonsdale Street
Melbourne, Victoria 3000
Australia

Remco C.J. Zwinkels (Contact Author)

VU University Amsterdam - Department of Finance and Financial Sector Management ( email )

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

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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
73
Abstract Views
537
rank
433,490
PlumX Metrics