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Arbitrageur Behavior In Sentiment-Driven Asset-Pricing

Author

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  • ERDEM KILIC

    (MEF University, Department of Economics, Maslak Campus, Istanbul, Turkey2Marmara University, Faculty of Business Administration, Department of Business Administration (German), Göztepe Campus, Istanbul, Turkey)

  • OGUZHAN GÖKSEL

    (Marmara University, Faculty of Economics, Department of Economics (English), Göztepe Campus, Istanbul, Turkey)

Abstract

This study aims to model arbitrageur behavior in a sentiment-driven capital asset-pricing model under the premise of reflecting a more detailed decomposition of investor types in the equity markets. We explore the behavior and the impact of arbitrageur behavior, particularly, on pricing and on key financial ratios. We observe that the prevalence of the arbitrageur counteracts the effects of unsophisticated investors, resulting in a lower volatility of the price–dividend ratio, lower predictive power of changes in consumption for future price changes and lower equity premium. Thus, the results of our research allow us to conjecture that the extrapolation bias in the prices is lowered.

Suggested Citation

  • Erdem Kilic & Oguzhan Gã–Ksel, 2021. "Arbitrageur Behavior In Sentiment-Driven Asset-Pricing," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-37, September.
    • Handle: RePEc:wsi:afexxx:v:16:y:2021:i:03:n:s2010495221500159
    DOI: 10.1142/S2010495221500159
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