Chasing investor sentiment in stock market

Abstract

In this paper, we present a sentiment asset pricing model with the Chasers, who believe investor sentiment has significant impact on asset pricing and tend to chase investor sentiment, optimally inferring investor sentiment from asset price. We find that the impact of investor sentiment on asset price depends not only on the number of the Sentiment investors but also on the number of the Chasers; and the Chasers can amplify the impact of investor sentiment on asset price. If investor sentiment is optimistic, the Chasers would increase stock price; and if investor sentiment is pessimistic, the Chasers would decrease stock price. Moreover, we demonstrate that the Chasers can also increase stock price volatility. The model could offer a partial explanation to the phenomenon of overvaluation, undervaluation and excess volatility.