Overconfidence And Asset Pricing,

Asset pricing is the most important subject in finance. The current asset pricing models can be classfied into two categories. The first one is Valuation models based on the so called intrinsic value. In the first category, the most famous model is dividend discount model which is given by William. The second one is represented by CAPM, APT and BS formula. But all these pricing models are under the framework of EMH, suppose the human beings are fully rational. With the progress of the research, many market anomalies which can't be explained by the EMH theory are found. Then, researchers begin to reflect on the EMH theory, and propose the most influential theory, behavioral finance. The field has two building blocks: limits to arbitrage and psychology, which catalogues the kinds of deviations from full rationality we might expect to see. Based on behavioral finance theories, this thesis select the overconfidence psychology to establish asset pricing models, and deeply researches asset pricing. Main achievements and results of this thesis are as follows:1. Based on the general utility function, an irrational risk premium model is established. A model of market risk premium through the interaction of rational investors and irrational investors is constructed. The bias problem of irrational risk premium relative to the rational risk premium and the market risk premium is studied. Conclusion is that the degree of the bias of the irrational risk premium relative to the market risk premium depends on the value weighting of the irrational investors.2. Based on the dividend discount model, a dynamic pricing model is built, which uses the idea of real business cycle model. Under the stochastic technology shock and the tax rate change, the dynamic prices are studied. Some valuation models based on the overconfidence are established, which includes intrinsic model and relative pricing model.3. The measurements of perceived risk based overconfidence psychology are studied. At first, perceived variance is presented; second, using the perceived risk based on Shannon's entropy, a rational perceived risk measuring model and an overconfidence perceived risk measuring model are presented; third, based on the benchmark return, a perceive risk measuring model is presented. The relation between benchmark return and perceived risk is studied. Results show that the correlation between the benchmark return and perceived risk is positive.4. Asset portfolio theory and CAPM based on overconfidence are presented. The perceived efficient frontier is proved, and asset allocation regarding risk free interest based overconfidence is studied. The perceived CML and SML are built.5. The impact of overconfidence on the price of option is also studied. First, a bintree pricing model based on overconfidence is established; second, a BS option pricing model based on overconfidence is presented; third, some real option models based on overconfidence are calculated.