A Review of Investor Sentiment and Asset Pricing from the Perspective of Behavioral Finance

DOI: https://doi.org/10.62517/jse.202611302

Author(s)

Yuhan Cheng

Affiliation(s)

Financial Technology Major, School of Finance, Shanxi University of Finance and Economics, Taiyuan, Shanxi, China

Abstract

This review examines investor sentiment and asset pricing via behavioral finance, challenging the traditional rational paradigm. It synthesizes global findings on behavioral influences, integrating cognitive biases and prospect theory to refine investor behavior analysis.The study contrasts traditional CAPM/APT with behavioral models (incorporating sentiment indicators), revealing how sentiment shapes investment behaviors, prices, and volatility. It analyzes sentiment measurement techniques (surveys, market proxies) and their predictive power, focusing on China's A-share market-retail-dominated, informationally asymmetric-through case studies of bubbles, panics, and policy shocks.Based on these analyses, the research develops a sentiment-integrated investment framework to enhance portfolio performance and risk management, providing investor guidelines. It also proposes targeted regulatory and investor education reforms to improve market efficiency and mitigate biases. This study bridges behavioral finance theory and practice, delivering actionable insights for professionals, policymakers, and regulators in emerging markets.

Keywords

Behavioral Finance; Investor Sentiment; Asset Pricing; Cognitive Bias; Investment Strategy

References

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