Investor sentiment, information and asset pricing model

- We examine the changes of price with different information and sentiment.
- The proportion of sentiment investors can amplify the sentiment shock on the price.
- The information quality could amplify the sentiment shock on the price.
- Learning from prices, all the information is incorporated into prices.

We present an asset pricing model with investor sentiment and information, which shows that the investor sentiment has a systematic and significant impact on the asset price. The equilibrium price's rational term drives the asset price to the rational, and the sentiment term leads to the asset price deviating from it. In our model, the proportion of sentiment investors and the information quality could amplify the sentiment shock on the asset price. Finally, the information is fully incorporated into prices when sentiment investors learn from prices. The model could offer a partial explanation of some financial anomalies: price bubbles, high volatility, asset prices' momentum effect and reversal effect.