Fundamentalists heterogeneity and the role of the sentiment indicator

This paper is a contribution to the literature on the role of the sentiment indices in heterogeneous asset pricing models. We propose a new sentiment index in a financial market where we assume that transactions take place between two groups of fundamentalists that differentiate on the perception of the fundamental value. We assume that the fraction of fundamentalists in the two groups depends on the sentiment index. After studying the analytical properties of the deterministic discrete dynamical system we compare the new index with a previous index introduced in financial literature. For this purpose, by adding stochastic components to the fundamentalist' demands, we measure the performance of our model under different sentiment indices and we test its explanatory power to reproduce the stylized facts of financial data relying on the S&P500 index.