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Equilibrium Portfolio Strategies in the Presence of Sentiment Risk and Excess Volatility
Ist Teil von
The Journal of finance (New York), 2009-04, Vol.64 (2), p.579-629
Ort / Verlag
Malden, USA: Blackwell Publishing Inc
Erscheinungsjahr
2009
Link zum Volltext
Quelle
Wiley Online Library - AutoHoldings Journals
Beschreibungen/Notizen
Our objective is to identify the trading strategy that would allow an investor to take advantage of "excessive" stock price volatility and "sentiment" fluctuations. We construct a general equilibrium "difference-of-opinion" model of sentiment in which there are two classes of agents, one of which is overconfident about a public signal, while still optimizing intertemporally. Overconfident investors overreact to the signal and introduce an additional risk factor causing stock prices to be excessively volatile. Consequently, rational investors choose a conservative portfolio; moreover, this portfolio depends not just on the current price divergence but also on their prediction about future sentiment and the speed of price convergence.