Behavioral asset pricing under expected feedback mode

Abstract

We develop an enhanced DSSW model of behavior asset pricing by introducing the expected feedback mode. Through numerical simulation, it has been theoretically proved that risky asset price is jointly determined by trend extrapolated effect of expected feedback traders and the creating space effect of noise traders, and that price fluctuation depends on the expected feedback coefficient. As expected feedback traders' expectation return has been realized and the above two effects are obviously imbalance, their confidence will deteriorate prior to price collapse, and eventually achieve self-fulfilling expectation of price reversal in the process of price momentum. This model sheds lights on financial anomalies of trade size clustering and the formation of stock bubble, besides it provides a new perspective for avoiding the “bewitching” trading and reducing market volatility.