A Literature Review of Heterogeneous Belief, Investor Sentiment and Asset Pricing

Abstract

In behavior finance, heterogeneous belief and investor sentiment are widely used in analyzing financial anomalies. Current literature studies separately the effects of heterogeneous belief and investor sentiment on asset pricing. According to related studies, this paper puts forth that heterogeneous belief and investor sentiment should be combined to study the integrated effects on asset pricing. Hence, this paper surveys separately the literature about the effects of heterogeneous belief and investor sentiment on asset pricing, including mainly the definitions, theoretical models, the selection of proxy indexes and the application effects on asset pricing. Accordingly, it puts forward a simple model of the integrated effects of the interaction between heterogeneous belief and investor sentiment on asset pricing. We hope that it will be favor to contrast the difference and relation between heterogeneous belief and investor sentiment, and to provide some inspiration about the theoretical and empirical study of combining heterogeneous belief and investor sentiment.