Behavioral heterogeneity and financial crisis: The role of sentiment
Journal Publication ResearchOnline@JCUAbstract
Recent empirical works have confirmed the importance of sentiment in asset pricing. In this paper, we propose that sentiment may not affect everyone in a homogeneous way. We construct a sentiment indicator taking into consideration behavioral heterogeneity of interacting investors. We find that sentiment contributes to several financial anomalies such as fat tails and volatility clustering of returns. More importantly, investor sentiment could be a significant source of financial market volatility. Our model with sentiment is able to replicate different types of crises, in which the crisis severity is enhanced with rise of sentiment sensitivity of chartist traders.
Journal
Physica A: statistical mechanics and its applications
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Volume
603
ISBN/ISSN
1873-2119
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Pages Count
21
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Publisher
Elsevier
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Date
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EISSN
N/A
DOI
10.1016/j.physa.2022.127767