Behavioral heterogeneity and financial crisis: The role of sentiment

Li, Changtai, Tan, Sook Rei, Nick, Ho, and Chia, Wai Mun (2022) Behavioral heterogeneity and financial crisis: The role of sentiment. Physica A: statistical mechanics and its applications, 603. 127767.

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DOI: 10.1016/j.physa.2022.127767

View at Publisher Website: https://doi.org/10.1016/j.physa.2022.127...

Abstract

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.


Item ID:	76682
Item Type:	Article (Research - C1)
ISSN:	1873-2119
Copyright Information:	© 2022 Elsevier B.V. All rights reserved. AAM may be made open access in an Institutional Repository under a CC BY-NC-ND license after a 24 month embargo.
Date Deposited:	03 Nov 2022 01:22
FoR Codes:	38 ECONOMICS > 3801 Applied economics > 380102 Behavioural economics @ 50% 38 ECONOMICS > 3801 Applied economics > 380107 Financial economics @ 50%
SEO Codes:	15 ECONOMIC FRAMEWORK > 1599 Other economic framework > 159999 Other economic framework not elsewhere classified @ 100%
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