Investors' Sentiments And Emotional Asset Pricing Models

Investor sentiment has gain numerous popularity from investors and scholars.This paper mainly studies investor sentiment and the sentimental asset pricing models.We propose a method to calculate a composite investor sentiment indicator which will provide an excellent sentimental indicator.Furthermore,if the indicator is introduced into the of CAPM and FF three-factor model,it will improve the behaviour and outcome of asset pricing models.Primarily,this article defines the investors' sentiment,and the original sentimental indicators are described clearly.Sentimental indicators can be divided into two categories,one is to reflect investors sentiment,the other is to impact investor sentiment.We focus on the former,which includes turnover rate,closed-end fund discounts,etc.Moreover,this article also establishes a criterion to determine which sentimental indicator is the best choice.Excellent sentimental indicators are required to be associated with the trend of stock prices,emotional indicators of the changes in stock returns need to have an impact,but also need to be robust.Subsequently,we can establish a state space model to calculate the composite investor Sentimental indicator.Since the parameters in the model are unknown,the model needs to be transformed into an adaptive system identification,which is a nonlinear state space model and can be solved by the extended Kalman filter.Although the principal component analysis and TOPSIS method can also construct the composite sentimental indicators,the indicators established by the state space model method behaves better by the criterion.Therefore,compared with the principal component analysis and TOPSIS method,state space model method will obtain the optimal composite investor emotional indicators.Ultimately,this paper also introduces the composite investor sentiment indicator in the asset pricing models.We find that the addition of sentimental factors to the CAPM or FF three-factor model will result in a decrease in the AIC and improved the improvement of the goodness of the fit.In the original asset pricing model,the single factor or three factors still cannot explain everything.However,the introduction of sentimental factors will provide a reasonable explanation.The introduction of emotional factors is effective,and it will play a significant role in improving the asset pricing model.