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Estimation of an agent-based model of investor sentiment formation in financial markets

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  • Lux, Thomas
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    Abstract

    We use weekly survey data on short-term and medium-term sentiment of German investors to estimate the parameters of a stochastic model of opinion formation governed by social interactions. The bivariate nature of our data set also allows us to explore the interaction between the two hypothesized opinion formation processes, while consideration of the simultaneous weekly changes of the stock index DAX enables us to study the influence of sentiment on returns. Technically, we extend the maximum likelihood framework for parameter estimation in agent-based models introduced by Lux (2009a) by generalizing it to bivariate and tri-variate settings. As it turns out, our results are consistent with strong social interaction in short-run sentiment. While one observes abrupt changes of mood in short-run sentiment, medium-term sentiment is a more slowly moving process in which the influence of social interaction seems to be less pronounced. The tri-variate model entails a significant effect from short-run sentiment on prices in-sample, but its out-of-sample predictive performance does not beat the random walk benchmark.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 36 (2012)
    Issue (Month): 8 ()
    Pages: 1284-1302

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    Handle: RePEc:eee:dyncon:v:36:y:2012:i:8:p:1284-1302

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Opinion formation; Social interaction; Investor sentiment;

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    References

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    Cited by:
    1. Thomas Lux, 2013. "Inference for systems of stochastic differential equations from discretely sampled data: a numerical maximum likelihood approach," Annals of Finance, Springer, vol. 9(2), pages 217-248, May.
    2. Li, Da-Ye & Nishimura, Yusaku & Men, Ming, 2014. "Fractal markets: Liquidity and investors on different time horizons," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 407(C), pages 144-151.

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