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Pricing Stocks with Yardsticks and Sentiments

Author

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  • Jørgen Vitting Andersen

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique)

Abstract

Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit from a market subject to huge price swings, and also how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day. Here we introduce the idea that people use heuristics, or "rules of thumb", in terms of "yard sticks" from the performance of the other stocks in a stock index. The under or over performance with respect to such a yard stick then signifies a general negative or positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks.We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years

Suggested Citation

  • Jørgen Vitting Andersen, 2011. "Pricing Stocks with Yardsticks and Sentiments," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-01396611, HAL.
    • Handle: RePEc:hal:cesptp:hal-01396611
    DOI: 10.3233/AF-2011-013
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    Cited by:

    1. Anderson, Keith & Brooks, Chris, 2014. "Speculative bubbles and the cross-sectional variation in stock returns," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 20-31.

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