Investor Sentiments Role in Deciding Market Returns Free Essay Example, 1500 words

The overall question of exploring and understanding as to whether the investor sentiments actually result in an impact on the stock prices has been decided. The renewed focus is on measuring the impact of investor sentiments and how it actually translates into the price and return changes in assets. Some of the variables or the psychological biases which are studied include overconfidence, representativeness as well as the conservatism. This also includes how the investors actually underreact or overreact to the past returns and the stock fundamentals. ( Barberis, N.There is an underlying assumption that the investors act rationally and every decision is actually driven by how investors actually rationalize. This underlying belief and assumption has driven much of the theory in finance and suggests that since investors are rational in their actions, therefore, all the assets are showing their intrinsic value. This assumption also suggests that the information is readily accepted by the investors and it reflects into the overall prices being experienced by the market. The arbitrage principle underlying the traditional finance theory also suggests that any price deviations will be corrected by the market participants in order to restore the equilibrium within the market. We will write a custom essay sample on Investor Sentiments Role in Deciding Market Returns or any topic specifically for you Only $17.96 $11.86/page