@article{
 title = {A Model of Market Sentiment},
 type = {article},
 year = {2016},
 id = {e2fc05a4-647c-3ea2-ad0b-7441f4f20ff2},
 created = {2016-10-31T11:02:51.000Z},
 file_attached = {false},
 profile_id = {8856f0a8-e934-3b54-83b3-1dc0f138e432},
 group_id = {bd0f1172-1660-3fe3-b7d0-9f2d0b4051ad},
 last_modified = {2017-03-14T12:29:36.496Z},
 tags = {DOLFINS_T1.4,DOLFINS_WP1},
 read = {false},
 starred = {false},
 authored = {false},
 confirmed = {true},
 hidden = {false},
 citation_key = {Bottazzi2016},
 abstract = {Several influential studies show that returns tend to underreact to news in the short-run while overreact in the long-run. The behavioral finance literature links the emergence of this underreaction and overreaction to investors’ cognitive biases in the processing of new information. These contributions are instead silent on the possible effects entailed by the wealth dynamics deriving from the interaction of heterogeneous investors. In this paper we propose a stylized agent based model of a financial market aimed at linking heterogeneous investors’ wealth dynamics with assets returns underreaction and overreaction. We assume that there are two groups of investors trading long-lived assets and interpret their dividend payments as news. We assume that dividends follow a Markov process that generates a positive autocorrelation. Investors believe that the underlying process is iid and have heterogeneous beliefs concerning assets’ dividend payment process. We show how the dividend positive autocorrelation together with investors long-run survival is able to generate both short-run underreaction and long-run overreaction. A ”market sentiment” emerges: despite single investors hold constantly rebalanced portfolios, their relative wealth dynamics is such that the aggregate investor react to news as behavioral models suggest. Our model suggests two testable hypotheses of which we offer some empirical evidence: dividend autocorrelation is positively related to underreaction and negatively related to overreaction, instead divergence of opinions is positively correlated to both underreaction and overreaction.},
 bibtype = {article},
 author = {Bottazzi, Giulio},
 journal = {paper-progress}
}

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