Modelling and measuring the irrational behaviour of agents in financial markets: discovering the psychological soliton

DOI10.1016/J.CHAOS.2015.12.015MaRDI QIDQ508295zbMATH OpenOpenAlexFDO

Authors Gurjeet S. Dhesi, Marcel R. Ausloos

Publication date 10 February 2017

Published in Chaos, Solitons and Fractals (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1601.01553, http://researchopen.lsbu.ac.uk/742/1/CSFsubmitrev2final.pdf

zbMATH Keywords

geometric Brownian motionsolitonirrational behaviourirrational fractional Brownian motion

Mathematics Subject Classification ID

Applications of Brownian motions and diffusion theory (population genetics, absorption problems, etc.) (60J70) Fractional processes, including fractional Brownian motion (60G22) Dynamical systems in optimization and economics (37N40) Financial applications of other theories (91G80)

Abstract: Following a Geometrical Brownian Motion extension into an Irrational Fractional Brownian Motion model, we re-examine agent behaviour reacting to time dependent news on the log-returns thereby modifying a financial market evolution. We specifically discuss the role of financial news or economic information positive or negative feedback of such irrational (or contrarian) agents upon the price evolution. We observe a kink-like effect reminiscent of soliton behaviour, suggesting how analysts' forecasts errors induce stock prices to adjust accordingly, thereby proposing a measure of the irrational force in a market.

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Cites work

• A Rational Route to Randomness
• Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation
• Breather and soliton wave families for the sine–Gordon equation
• Heterogeneous beliefs and routes to chaos in a simple asset pricing model
• Market efficiency of the post communist East European stock markets
• Strategy for investments from Zipf law(s)

Cited in

(9)

• A generalized error distribution copula-based method for portfolios risk assessment
• Modelling and forecasting the kurtosis and returns distributions of financial markets: irrational fractional Brownian motion model approach
• Proactive hedging European call option pricing with linear position strategy
• A model for the dynamic behavior of financial assets affected by news: the case of Tohoku-Kanto earthquake
• Stochastic model of financial markets reproducing scaling and memory in volatility return intervals
• Bayesian estimation and entropy for economic dynamic stochastic models: an exploration of overconsumption
• Complexity in quantitative finance and economics
• The invisible hand and the rational agent are behind bubbles and crashes
• Pricing of proactive hedging European option with dynamic discrete position strategy

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