A threshold model of investor psychology

Research output: Contribution to journalArticle

26 Citations (Scopus)

Abstract

We introduce a class of agent-based market models founded upon simple descriptions of investor psychology. Agents are subject to various psychological tensions induced by market conditions and endowed with a minimal 'personality'. This personality consists of a threshold level for each of the tensions being modeled, and the agent reacts whenever a tension threshold is reached. This paper considers an elementary model including just two such tensions. The first is 'cowardice', which is the stress caused by remaining in a minority position with respect to overall market sentiment and leads to herding-type behavior. The second is 'inaction', which is the increasing desire to act or re-evaluate one's investment position. There is no inductive learning by agents and they are only coupled via the global market price and overall market sentiment. Even incorporating just these two psychological tensions, important stylized facts of real market data, including fat-tails, excess kurtosis, uncorrelated price returns and clustered volatility over the timescale of a few days are reproduced. By then introducing an additional parameter that amplifies the effect of externally generated market noise during times of extreme market sentiment, long-time volatility correlations can also be recovered.
LanguageEnglish
Pages463-478
Number of pages15
JournalPhysica A: Statistical Mechanics and its Applications
Volume354
DOIs
Publication statusPublished - 19 Mar 2005

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psychology
Threshold Model
thresholds
personality
volatility
Volatility
kurtosis
fats
minorities
Herding
Inductive Learning
Fat Tails
Stylized Facts
learning
Market Model
Agent-based Model
Kurtosis
Market
Psychology
Excess

Keywords

  • investor psychology
  • volatility clustering
  • kurtosis
  • herding

Cite this

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A threshold model of investor psychology. / Cross, R.

In: Physica A: Statistical Mechanics and its Applications, Vol. 354, 19.03.2005, p. 463-478.

Research output: Contribution to journalArticle

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