Heterogeneity, herding, sentiment risk and asset pricing in the Norwegian stock market

Abstract

The research issues addressed in our master thesis concern heterogeneity in different forms as a red thread that connects together the tests we carried out. The setting of our research is the Norwegian stock market. We examined the role of sentiment risk as a rate of change in heterogeneity of opinions in the stock exchange. Sentiment risk helps explain the volume of trading and volatility in the Norwegian stock market. Heterogeneity in the behavior of market agents can lead to departures from the predicted linear relationship between the equity return dispersions and market return. Heterogeneity in consumption capital asset pricing increases the volatility of consumption and has the potential to contribute to a better explanation of the risk premium. Our main conclusion is that heterogeneity in its various forms can be an important ingredient in models attempting to explain the volume of trading, the volatility of market return and the behavior of market participants.