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A general equilibrium model of investor sentiment

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  • Bottazzi, Giulio
  • Giachini, Daniele

Abstract

This paper studies the occurrence of price momentum and reversal in a general equilibrium setting, with complete markets and expected utility maximizing agents. We show that price anomalies can generically emerge when agents derive their individual probabilities from reinforcing and progressive learning processes defined over misspecified models.

Suggested Citation

  • Bottazzi, Giulio & Giachini, Daniele, 2022. "A general equilibrium model of investor sentiment," Economics Letters, Elsevier, vol. 218(C).
    • Handle: RePEc:eee:ecolet:v:218:y:2022:i:c:s0165176522002658
    DOI: 10.1016/j.econlet.2022.110749
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    References listed on IDEAS

    as
    1. Marco Ottaviani & Peter Norman Sørensen, 2015. "Price Reaction to Information with Heterogeneous Beliefs and Wealth Effects: Underreaction, Momentum, and Reversal," American Economic Review, American Economic Association, vol. 105(1), pages 1-34, January.
    2. Giulio Bottazzi & Pietro Dindo & Daniele Giachini, 2019. "Momentum and reversal in financial markets with persistent heterogeneity," Annals of Finance, Springer, vol. 15(4), pages 455-487, December.
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    5. Julien Cujean & Michael Hasler, 2017. "Why Does Return Predictability Concentrate in Bad Times?," Journal of Finance, American Finance Association, vol. 72(6), pages 2717-2758, December.
    6. Ronald Balvers & Yangru Wu & Erik Gilliland, 2000. "Mean Reversion across National Stock Markets and Parametric Contrarian Investment Strategies," Journal of Finance, American Finance Association, vol. 55(2), pages 745-772, April.
    7. Barberis, Nicholas & Shleifer, Andrei & Vishny, Robert, 1998. "A model of investor sentiment," Journal of Financial Economics, Elsevier, vol. 49(3), pages 307-343, September.
    8. Harrison Hong & Jeremy C. Stein, 1999. "A Unified Theory of Underreaction, Momentum Trading, and Overreaction in Asset Markets," Journal of Finance, American Finance Association, vol. 54(6), pages 2143-2184, December.
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    10. Clifford S. Asness & Tobias J. Moskowitz & Lasse Heje Pedersen, 2013. "Value and Momentum Everywhere," Journal of Finance, American Finance Association, vol. 68(3), pages 929-985, June.
    11. Epstein Larry G & Noor Jawwad & Sandroni Alvaro, 2010. "Non-Bayesian Learning," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-20, January.
    12. Jiang Luo & Avanidhar Subrahmanyam & Sheridan Titman & Itay Goldstein, 2021. "Momentum and Reversals When Overconfident Investors Underestimate Their Competition," Review of Economic Studies, Oxford University Press, vol. 34(1), pages 351-393.
    13. Narasimhan Jegadeesh & Sheridan Titman, 2001. "Profitability of Momentum Strategies: An Evaluation of Alternative Explanations," Journal of Finance, American Finance Association, vol. 56(2), pages 699-720, April.
    14. Jiang Luo & Avanidhar Subrahmanyam & Sheridan Titman, 2021. "Momentum and Reversals When Overconfident Investors Underestimate Their Competition [The financial crisis of 2007–2009: Causes and remedies]," The Review of Financial Studies, Society for Financial Studies, vol. 34(1), pages 351-393.
    15. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. "Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Momentum; Continuation; Reversal; Biased learning; Bayesian learning; Model misspecification;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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