Pricing stocks with yardsticks and sentiments

Sebastıan Martınez Bustos; Jorgen Vitting Andersen; Michel Miniconi; Andrzej Nowak; Magdalena Roszczynska-Kurasinska; David Bree

arXiv · 1109.6909

Pricing stocks with yardsticks and sentiments

Sebastıan Martınez Bustos·Jorgen Vitting Andersen·Michel Miniconi·Andrzej Nowak·Magdalena Roszczynska-Kurasinska·David Bree

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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.

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Sebastıan Martınez Bustos, Jorgen Vitting Andersen, Michel Miniconi, Andrzej Nowak, Magdalena Roszczynska-Kurasinska, David Bree. 2011-09-30. Pricing stocks with yardsticks and sentiments. https://arxiv.org/abs/1109.6909

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