Investor's sentiment in multi-agent model of the continuous double auction

DOI10.1142/S0219024916500400zbMATH Open1396.91751arXiv1208.3083OpenAlexW2285114437MaRDI QIDQ2828057FDOQ2828057

Authors: Stepan Muzychka, Kirill Vaninsky, A. A. Lykov 

Publication date: 24 October 2016

Published in: International Journal of Theoretical and Applied Finance (Search for Journal in Brave)

Abstract: We introduce and treat rigorously a new multi-agent model of the continuous double auction or in other words the order book (OB). It is designed to explain collective behaviour of the market when new information affecting the market arrives. The novel feature of the model is two additional slow changing parameters, the so-called sentiment functions. These sentiment functions measure the conception of the fair price of two groups of investors, namely, bulls and bears. Our model specifies differential equations for the time evolution of sentiment functions and constitutes a nonlinear Markov process which exhibits long term correlations. We explain the intuition behind equations for sentiment functions and present numerical simulations which show that the behaviour of our model is similar to the behaviour of the real market. We also obtain a diffusion limit of the model, the Ornstein-Uhlenbeck type process with variable volatility. The volatility is proportional to the difference of opinions of bulls and bears about the fair price of a security. The paper is complimentary to our previous work where mathematical proofs are presented.

Full work available at URL: https://arxiv.org/abs/1208.3083

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zbMATH Keywords

behavioral financecontinuous double auctiondiffusion with variable volatility

Mathematics Subject Classification ID

Derivative securities (option pricing, hedging, etc.) (91G20) Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Continuous-time Markov processes on discrete state spaces (60J27)

Cites Work

• A class of nonlinear random walks related to the Ornstein-Uhlenbeck process
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• The birth and death processes as diffusion processes
• MEAN-REVERTING STOCHASTIC VOLATILITY
• One-dimensional classical massive particle in the ideal gas

Cited In (5)

• Mutual relevance of investor sentiment and finance by modeling coupled stochastic systems with MARS
• Simple stochastic order-book model of swarm behavior in continuous double auction
• A behavioural model of investor sentiment in limit order markets
• Investor sentiment and trading behavior
• A multi agent model for the limit order book dynamics

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