About Excessive Volatility and Sentiment Fluctuations? Our objective is to understand the trading strategy that would allow an investor to take advantage of “excessive ” stock price volatility and “sentiment ” fluctuations. We construct a general equilibrium model of sentiment. In it, there are two classes of agents and stock prices are excessively volatile because one class is overconfident about a public signal. As a result, this class of irrational agents changes its expectations too often, sometimes being excessively optimistic, sometimes being excessively pessimistic. We determine and analyze the trading strategy of the rational investors who are not overconfident about the signal. We find that because irrational traders introduce an additional source of risk, rational investor
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