Study On The Pricing Model Of Risky Assets Based On Behavioral Finance

Shleife(r1998)thought that the profit of investment should be random on the track of time, however, when investors estimate the expected profit, they usually consider it from two aspects: regress of prospect and trend continuing . This naturally causes two phenomena: over-reaction and under-reaction in the financial market. Most exceptional phenomena belong to these two classes .This paper will use behavioral finance to study the reaction characteristics and the price of risking assets in the financial market. Firstly we compare the theories of behavioral finance and traditional finance in micro level. According to behavioral finance, investors are limited rational, and the market is ineffective. Limited rational traders usually aren't able to capture all correct information or deal with all information rationally. This paper assumes that there are three kinds of traders: rational trader, under-reaction trader and over-reaction trader. All traders use Bayesian principle to modify prior distributions. We have obtained the short-term equilibrium price of the risky asset. In order to test applicability of our model, we give an empirical analysis of Shanghai stock market. After theoretical and empirical analysis, some new investment strategies based on behavioral finance are given.