Communication impacting financial markets

Jørgen Vitting Andersen (), Ioannis Vrontos, Petros Dellaportas and Serge Galam
Additional contact information
Jørgen Vitting Andersen: Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr
Ioannis Vrontos: Athens University of Economics and Business - Department of Statistics
Serge Galam: CEVIPOF - Center for Political Research

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Background: Since the attribution of the Nobel prize in 2002 to Kahneman for prospect theory, behavioral finance has become an increasingly important subfield of finance. However the main parts of behavioral finance, prospect theory included, understand financial markets through individual investment behavior. Behavioral finance thereby ignores any interaction between participants. Methodology: We introduce a socio-financial model that studies the impact of communication on the pricing in financial markets. Considering the simplest possible case where each market participant has either a positive (bullish) or negative (bearish) sentiment with respect to the market, we model the evolution of the sentiment in the population due to communication in subgroups of different sizes. Nonlinear feedback effects between the market performance and changes in sentiments are taking into account by assuming that the market performance is dependent on changes in sentiments (e.g. a large sudden positive change in bullishness would lead to more buying). The market performance in turn has an impact on the sentiment through the transition probabilities to change an opinion in a group of a given size. The idea is that if for example the market has observed a recent downturn, it will be easier for even a bearish minority to convince a bullish majority to change opinion compared to the case where the meeting takes place in a bullish upturn of the market. Conclusions: Within the framework of our proposed model financial markets stylized facts such as volatility clustering and extreme events may be perceived as arising due to abrupt sentiment changes via ongoing communication of the market participants. The model introduces a new volatility measure which is apt of capturing volatility clustering and from maximum likelihood analysis we are able to apply the model to real data and give additional long term insight into where a market is heading

Keywords: Communication; formation of prices; stylized facts (search for similar items in EconPapers)
JEL-codes: G02 G12 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-04
New Economics Papers: this item is included in nep-fmk
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Citations: View citations in EconPapers (17)

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ftp://mse.univ-paris1.fr/pub/mse/CES2014/14029.pdf (application/pdf)

Related works:
Working Paper: Communication impacting financial markets (2014)
Working Paper: Communication impacting financial markets (2014)
Working Paper: Communication impacting financial markets (2014)
Working Paper: Communication impacting financial markets (2014)
Working Paper: Communication impacting financial markets (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:14029

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