Investor Sentiment Effects On Ratio Of Pricing Error

In standard finance, the assume “rational investor” has their own limitations. In the last1970s, there are many anomalies of market that are hard to be explained by standard financetheory. At the same time, efficient market hypothesis is also being questioned. Since the1980s,Behavioral finance which relax “rational investor” hypothesis began to rise. Then, behavioralfinance obtained the full affirmation by more and more researchers. Because behavioralfinance very good explained many anomalies of market.Behavioral finance theory relaxed rational investor hypothesis in order to close to thereal financial market. From the view of investor psychology, the securities prices will beaffected by investors’ sentiment. As the further study in the behavioral finance, researchersdiscovered that stock return will find a different change with the sentiment changes indifferent market conditions.The core of the article is the cross section analysis on the correlation between the pricingerror and investor sentiment. Firstly, this article cite the method of investor sentiment whichbeen proposed the paper of Baker and Wurgler at2006in order to create investor sentimentproxies. The paper also used two investor sentiments, the one is overall market sentiment,the other is individual stock sentiment. The paper cite the method of intrinsic value valuationwhich been proposed the paper of Bakshi and Chen in2005in order to create pricing errorproxies. The paper proves investor sentiment is stock pricing error influence factor throughthe simple regression model. The paper appear to provide further evidence that thedifference reaction will been find in the influence of investor sentiment on stock pricingerror. The paper will put investor sentiment proxies into Fama-French three factors modeland calculate the result.