Predictable markets? A news-driven model of the stock market

Gusev, Maxim and Kroujiline, Dimitri and Govorkov, Boris and Sharov, Sergey V. and Ushanov, Dmitry and Zhilyaev, Maxim (2014): Predictable markets? A news-driven model of the stock market. Forthcoming in: Algorithmic Finance

Abstract

We attempt to explain stock market dynamics in terms of the interaction among three variables: market price, investor opinion and information flow. We propose a framework for such interaction and apply it to build a model of stock market dynamics which we study both empirically and theoretically. We demonstrate that this model replicates observed market behavior on all relevant timescales (from days to years) reasonably well. Using the model, we obtain and discuss a number of results that pose implications for current market theory and offer potential practical applications.

• Item Type: MPRA Paper
• Language: English
• Keywords: stock market, market dynamics, return predictability, news analysis, language patterns, investor behavior, herding, business cycle, sentiment evolution, reference sentiment level, volatility, return distribution, Ising, agent‐based models, price feedback, nonlinear dynamical systems
• Subjects: C - Mathematical and Quantitative Methods > C3 - Multiple or Simultaneous Equation Models ; Multiple Variables; G - Financial Economics > G1 - General Financial Markets; G - Financial Economics > G1 - General Financial Markets > G17 - Financial Forecasting and Simulation

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