Equilibrium Pricing Model Of Stocks Based On Investors' Overconfidence And Pessimism

Traditional capital pricing theories price assets based on the hypothesis that market is efficient and investors are rational, thus forms such theories as Modern Portfolio Theory, Capital Asset Pricing Model and Arbitrage Pricing Theory etc. However empirical researches such as the riddle of equity premium and the acute fluctuation of stock price bring great challenge to it, and there are many defects on its fundamental theory, too.The gap between traditional asset pricing theories and real asset market has shaken researchers' confidence in holding the hypothesis that investors are totally rational. By introducing the related psychological research achievements into assets pricing field, and combining abnormal phenomena in capital market with investors' behavior from different angles, A new kinds of assets pricing models—behavioral assets pricing models are born based on that investors are investors are finitely rational and have real decision-making deviation.In this paper, we analyze and research the representations, cause of formation and influence to stock market by investor's overconfidence. A new equilibrium model are built based on research of Daniel,Hirshleifer and Subrahmanvum(2001). In the model we add a new kind of investor—over-pessimism investor. We discuss movement of equilibrium price caused by scale of investors and cognition precision of investor. Compared to DHS model (2001), because of over-pessimism investor in existence, the average responses of market are no long always higher than rational responses. The lower and equal to rational responses can also be seen. So our model is more accords with the practice. Then, in an incomplete competitive structure, introduced a type of small traders' psychology—overconfidence into Laffont and Maskin(1990)'s game to investigate the principal of the stock price formation and information revelation. Research shows if the average level of the small traders' overconfidence becomes higher, the price manipulation by the institutional trader will be more easily and deep. While the worse the prediction of the small traders psychology became, the more difficult the institutional trader would gain profit by this characteristic. The institutional trader can benefit through its manipulations, such as its influence of market, its control of counterparts' belief and behavior, and even hiding its private information. While...