Investor Sentiment,Investor Crowded-trade Behavior And Asset Pricing

Traditional capital asset pricing theory plays no role for irrational factors on asset prices,and thinks that arbitrageurs will eliminate the irrational behaviors and push asset prices close to fundatmental values.However,behavioral finance proves both theory and evidence which suggest what the deviations of asset prices from fundamental values are likely to be,and why they persist over time without being eliminated by arbitrage,and points outs the inefficiency of financial markets and how irrational factor affects stock prices.Based on the concept of “Humanizing Finance” of Shiller(2011,2014),this paper uses investor sentiment to capture how people really think,and investor crowded-trade behavior to capture how people really act in financial markets,and further investitage the roles of investor sentiment and investor crowded-trade behavior on asset prices.Therefore,this paper uncovers some market anomalies from the perceptive of investor sentiment and investor crowded-trade behavior: overreaction,underreaction,and limit of arbitrage.Finally,this paper investitages cross-section effects of investor sentiment and investor crowded-trade behavior.In general,this paper includes the following aspects.First,the role of investor sentiment on stock prices.On the one hand,based on CARA utility and general equilibrium theory,we construct sentiment asset pricing model to investitage how investor sentiment affects asset prices.Therefore,the underestimation model of bear markets and the overestimation model of bull market can clarify a range of financial anomalies: overreaction,underreaction,the fire sales and the limit of arbitrage.On the other hand,based on the method of Baker and Wurgler(2006),we measure daily individual stock investor sentiment and further explore the relationship between individual stock investor sentiment and individual stock excess returns.By panel dada analysis,we find both individual stock investor sentiment and individual stock investor sentiment change have significant significant impacts on individual stock returns which clarify the aggregate effect of individual stock investor sentiment on stock returns.Second,the role of investor crowded-trade behavior on stock prices.On the one hand,based on CARA utility and general equilibrium theory,we construct crowded-trade asset pricing model to illustrate how investors really act on a particular stock in stock market and further analyze how investor crowded-trade behavior affects stock prices.These results illustrate limit of arbitrage from the perspective of irrational investor crowded-trade behavior.Our framework can be helpful to explain a range of financial anomalies: the deviation of stock prices away from fundamental value,limit of arbitrage and so on.On the other hand,we use tracsaction data to construct individual stock crowded-trade behavior and further explore the relationship between individual stock crowded-trade behavior and individual stock excess returns.Using panel data analysis,we uncover that individual stock crowded-trade behavior has a significant impact on stock returns,furthermore,individual stock buyer-initiated crowded-trade behavior will push stock prices up,and individual stock seller-initiated crowded-trade behavior will make stock prices down.These results clarify the aggregate effect of individual stock crowded-trade behavior on stock returns.Third,we incorporate individual stock investor sentiment and individual stock crowded-trade behavior into panel data regression model to analyze the combined effects of individual stock investor sentiment and individual stock crowded-trade behavior on stock prices.We find both individual stock investor sentiment and individual stock investor crowded-trade behavior have significant impacts on stock retuns,stock returns will increase with individual stock investor sentiment and individual stock crowded-trade behavior.Furthermore,we test how individual stock investor sentiment and individual stock crowded-trade behavior impact stock returns in different size-sorted portfolios,and find individual stock investor sentiment and individual stock investor crowded-trade behavior have stronger impacts on small stocks.Finally,we explain the cross-section effects of investor sentiment and investor crowded-trade behavior on stock returns.On the one hand,we obtain annual data on firm age(A),price earnings ratio(PE),earnings per share(EPS),and fixed assets(PPE)from Wind database to describe firm characteristics,and group stocks into five quintiles,and use equal weighted method to caculate the investor sentiment and investor crowded-trade behavior of different stock portfolios.We find investor sentiment and investor crowded-trade behavior have different impacts on different stock portfolios by panel data analysis,further investor sentiment and investor crowded-trade behavior have greater imapcts on on younger stocks,lower PE stocks,lower EPS stocks,and lower PPE stocks by time-series data analysis.On the other hand,we use daily individual stock investor sentiment and individual stock crowded-trade behavior to sort stocks of Chinese Stock Markets.We find the positive relation among more optimistic and buyer-initiated crowded-trade stocks,and the negative relation among more pessimistic and seller-initiated crowded-trade stocks,which imply the significant cross-section effect of investor sentiment and investor crowded-trade behavior on stock returns.Overall,these results reveal that both investor sentiment and investor crowded-trade bebahvior have significant imapcts on stock prices.Therefore,corporating investor sentiment and investor crowded-trade behavior into empirical researches and theoretical models is helpful to describe the stock price movements.