Modeling bimodal stock price dynamics by a parsimonious diffusion process

Yaosong Zhan, Shiqing Ling, Zhenya Liu and Shixuan Wang

International Review of Financial Analysis, 2025, vol. 105, issue C

Abstract: We extend the double-well potential to a three-parameter model in order to capture the momentum and reversal effects in stock price dynamics. The proposed model is characterized by three parameters that control momentum, reversal, and volatility. By varying these parameters, the model can represent two distinct price patterns: (i) a mean-reverting pattern with a unimodal distribution, and (ii) a momentum pattern with a bimodal distribution. We develop an estimation method and establish its asymptotic properties, along with a simulation study to evaluate its finite sample performance. An empirical application using high-frequency data is provided to demonstrate the effectiveness of our proposed model in analyzing price dynamics.

Keywords: Double-well potential; Fokker–Planck equation; Price dynamics; Momentum; Reversal (search for similar items in EconPapers)
JEL-codes: G01 G11 G23 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:105:y:2025:i:c:s1057521925004545

DOI: 10.1016/j.irfa.2025.104367

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