| According to the Standard Financial Theory, market is efficient; price could manifest allinformation about risk asset; traders are rational, and they would make their own investmentdecisions according to the principle of utility maximization. However, with the rise anddevelopment of Behavioral Finance, quite a few theories, such as “Imperfectly Rational”,“Investor Sentiment”, which are inconsistent with efficient market and rational peoplehypothesis, are posing challenges to Standard Financial Theory.Among numerous Behavioral Finance theories, DSSW model proposed by De LongShleifer Summers and Waldmann in1990is one of the typical ones. Based on the empiricalperspective, the model divides market participants into two parts, and supposes thatequilibrium market price is determined by two kinds of traders who respond differently tomarket noise together. The model is empirically tested based on overseas financial market.Since Chinese financial market is still at the beginning stage, it is worth considering thatwhether this model could be directly applied to China market as to explain the pricing of riskasset.Based on DSSW model, this thesis establishes two types of capital asset pricing models,which are one-way influence model and two-way influence model. Those two types of modelsare manifested to be reasonable by empirically analyzing the inter-influence between institutional and retail investors’ sentiment in China’s “A Share”Market, and stock price. The modelsare also conducted multi-phase expansion simulation. As a result of the empirically analyzingthere is noise trading both in institutional and retail investors. Compared those two markets,price bubble due to one-way influence from institutional investors to retail investos in Shanghai results in two-way influence by institutional and retail investors in Shenzhen. Theone-way influence asset pricing model and two-way influence asset pricing model could offersome thoughts for further research on DSSW Model. |
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