9 Pages Posted: 1 Oct 2011 Last revised: 22 Oct 2012
Date Written: September 30, 2011
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.
Suggested Citation: Suggested Citation
Martinez Bustos, Sebastian and Vitting Andersen, Jorgen and Miniconi, Michel and Nowak, Andrzej and Roszczynska-Kurasinska, Magda and Bree, David, Pricing Stocks with Yardsticks and Sentiments (September 30, 2011). Algorithmic Finance (2012), 1:2, 183-190. Available at SSRN: https://ssrn.com/abstract=1936051 or http://dx.doi.org/10.2139/ssrn.1936051
By Todd Feldman