Opinion Dynamics in Financial Markets via Random Networks

Mateus F. B. Granha, Andr\'e L. M. Vilela, Chao Wang, Kenric P. Nelson and H. Eugene Stanley

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Abstract: We investigate the financial market dynamics by introducing a heterogeneous agent-based opinion formation model. In this work, we organize the individuals in a financial market by their trading strategy, namely noise traders and fundamentalists. The opinion of a local majority compels the market exchanging behavior of noise traders, whereas the global behavior of the market influences the fundamentalist agents' decisions. We introduce a noise parameter $q$ to represent a level of anxiety and perceived uncertainty regarding the market behavior, enabling the possibility for an adrift financial action. We place the individuals as nodes in an Erd\"os-R\'enyi random graph, where the links represent their social interaction. At a given time, they assume one of two possible opinion states $\pm 1$ regarding buying or selling an asset. The model exhibits such fundamental qualitative and quantitative real-world market features as the distribution of logarithmic returns with fat-tails, clustered volatility, and long-term correlation of returns. We use Student's t distributions to fit the histograms of logarithmic returns, showing the gradual shift from a leptokurtic to a mesokurtic regime, depending on the fraction of fundamentalist agents. We also compare our results with the distribution of logarithmic returns of several real-world financial indices.

Date: 2022-01
New Economics Papers: this item is included in nep-hme and nep-net
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Citations: View citations in EconPapers (2)

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