The sustainability of stock price fluctuations: Explanation from a recursive dynamic model

Abstract

The sustainability of stock price fluctuations indicated by many empirical studies hardly reconciles with the existing models in standard financial theories. This paper proposes a recursive dynamic asset pricing model based on the comprehensive impact of the sentiment investor, the information trader and the noise trader. The dynamic process of the asset price is characterized and a numerical simulation of the model is provided. The model captures the features of the actual stock price that are consistent with the empirical evidence on the sustainability of stock price fluctuations. It also offers a partial explanation for other financial anomalies, for example, asset price’s overreaction, asset bubble and the financial crisis. The major finding is that investor sentiment is the key factor to understand the sustainability of stock price fluctuations.

The Impact of Chatgpt Concept on the Share Price of Listed Companies

“…Paul and Frank found through their study that growth was associated with stock market booms and was positively correlated [9]. Xie, Xia and Gao found that investor sentiment is a key factor influencing large fluctuations in stock prices, while asset prices affected by investor sentiment always overreact [10]. Mbutor found that: exchange rate fluctuations have a strong impact on the all-stock index, and a decline in the volume of bank loans can also cause a decline in stock prices [11].…”

Does retail investors beat institutional investors?——Explanation of game stop’s stock price anomalies

“…On the theoretical side, some asset pricing models have been developed to support the role of investor sentiment, such as Mendel and Shleifer [ 20 ], Yan [ 21 ], Xie et al [ 22 ], Gao et al [ 23 ], Yang and Gao [ 24 ], Yang and Zhang [ 25 , 26 ], Yang and Li [ 27 , 28 ] demonstrated this view. Mendel and Shleifer [ 20 ], Yan [ 21 ], Xie et al [ 22 ] constructed asset pricing model that includes noise traders, their model illustrated the influence of noise on the stock price.…”

“…On the theoretical side, some asset pricing models have been developed to support the role of investor sentiment, such as Mendel and Shleifer [ 20 ], Yan [ 21 ], Xie et al [ 22 ], Gao et al [ 23 ], Yang and Gao [ 24 ], Yang and Zhang [ 25 , 26 ], Yang and Li [ 27 , 28 ] demonstrated this view. Mendel and Shleifer [ 20 ], Yan [ 21 ], Xie et al [ 22 ] constructed asset pricing model that includes noise traders, their model illustrated the influence of noise on the stock price. For example, Mendel and Shleifer [ 20 ] presented a chase noise model that most rational but uninformed traders occasionally chase noise as if it were information, thereby amplifying the sentiment shocks on prices, leading to a small number of noise traders can have a great impact on market equilibrium disproportionate to their size in the market.…”