Excess Volatility and Mispricing in the Presence of Sentiment and Institutional Investors

54 Pages Posted: 11 Dec 2022 Last revised: 13 Jan 2024

See all articles by Luis Goncalves-Pinto

Luis Goncalves-Pinto

University of New South Wales (UNSW)

Herve Roche

Universidad Adolfo Ibanez

Juan M. Sotes-Paladino

Universidad de los Andes, Chile

Date Written: November 30, 2023

Abstract

Against a prediction of standard models, an exacerbation of investor sentiment is often associated with lower asset price volatility in the data. We propose a model that can replicate this empirical pattern by interacting retail investor optimism with institutional benchmarking concerns. Both optimism and benchmarking separately increase the demand for a stock and decrease its risk premium. In contrast, their joint effect on stock volatility is more ambiguous, as the transmission of fundamental news to prices combines benchmarking and relative-wealth channels. The latter channel, in particular, can induce a negative and asymmetric relation between investor sentiment and the stock return's excess volatility. It also explains how a greater institutionalization of financial markets can reduce excess volatility and mispricing in the presence of high sentiment.
We show that these patterns are consistent with the data.

Keywords: Sentiment, Excess Volatility, Mispricing, Benchmarking, Institutional Investors.

JEL Classification: G11, G12, G18, G41.

Suggested Citation

Goncalves-Pinto, Luis and Roche, Herve and Sotes-Paladino, Juan M., Excess Volatility and Mispricing in the Presence of Sentiment and Institutional Investors (November 30, 2023). Available at SSRN: https://ssrn.com/abstract=4295275 or http://dx.doi.org/10.2139/ssrn.4295275

Luis Goncalves-Pinto

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

HOME PAGE: http://luis.goncalvespinto.com/

Herve Roche

Universidad Adolfo Ibanez ( email )

Santiago
Chile

Juan M. Sotes-Paladino (Contact Author)

Universidad de los Andes, Chile ( email )

Chile

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
85
Abstract Views
1,635
Rank
535,401
PlumX Metrics