Pricing stocks with yardsticks and sentiments
Abstract
Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit a market subject to huge price swings, and how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day? Here we introduce the idea that people use heuristics, or "rules of thumb", in terms of "yard sticks" from the performance of the other stocks in a stock index. The under- /over-performance with respect to such a yard stick then signifies a general negative/positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks. We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years.
Cite
@article{arxiv.1109.6909,
title = {Pricing stocks with yardsticks and sentiments},
author = {Sebastıan Martınez Bustos and Jorgen Vitting Andersen and Michel Miniconi and Andrzej Nowak and Magdalena Roszczynska-Kurasinska and David Bree},
journal= {arXiv preprint arXiv:1109.6909},
year = {2016}
}
Comments
10 pages, 5 figures