Market sentiment and heterogeneous fundamentalists in an evolutive financial market mode

Cavalli, Fausto and Naimzada, Ahmad and Pecora, Nicolò and Pireddu, Marina (2018): Market sentiment and heterogeneous fundamentalists in an evolutive financial market mode.

Abstract

We study a financial market populated by heterogeneous fundamentalists, whose decisions are driven by ``animal spirits''. Each agent may have optimistic or pessimistic beliefs about the fundamental value, which are selected from time to time on the basis of an evolutionary mechanism. The evolutionary selection depends on a weighted evaluation of the general market sentiment perceived by the agents and on a profitability measure of the existent strategies. As the relevance given to the sentiment index increases, a herding phenomenon in agents behavior may take place and the animal spirits can drive the market toward polarized economic regimes, which coexist and are characterized by persistent high or low levels of optimism and pessimism. This conduct is detectable from agents polarized shares and beliefs, which in turn influence the price level. Such polarized economic regimes can consist in stable steady states or can be characterized by endogenous complex dynamics, generating persistent alternating waves of optimism and pessimism, as well as return distributions displaying fat tails and excess volatility.

• Item Type: MPRA Paper
• Language: English
• Keywords: heterogeneous fundamentalists; animal spirits; behavioral finance; sentiment index; complex dynamics
• Subjects: B - History of Economic Thought, Methodology, and Heterodox Approaches > B5 - Current Heterodox Approaches > B52 - Institutional ; Evolutionary; C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations

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