JÖRG SOMMER and FRIEDRICH KUGLER

Endogenous Expectations and Market Sentiments on the Basis of the State Preference Model


On the basis of the State Preference Model endogenous adaption prozesses of heterogenous individuals lead to market sentiments and generate switching „bull“ and „bear“ markets. Individual bottoming and topping prices are anticipated, based on sophisticated analysis of long run considerations. Actual prices near the bottoming (topping) price are reflected in a more optimistic (pessimistic) attitude that fosters (weakens) the strength of the desired investors’ demand. The decision itself depends on the individual’s belief in their anticipated prices. A formalism is introduced which describes the formation of expectations about the market price in the next period The possible spread between the general mood and the decision itself generates different degrees of market sentiments. Numerical experiments show that extreme changes in these sentiments generate alternating periods of generally rising or generaly falling prices while the risk structure predominantly effects the fluctuating nature of stock market prices.

JEL-Classifikation: D 84, G 11

Key words: Expectations, speculations, portfolio choice.

Contact:

Department of Economics, Universitätsstr. 16, D-86135 Augsburg, Ph: +49 821 598 4179, Fax: +49 821 598 4229, E-Mail: Joerg Sommer
Jürgen Peters,25.03.1997