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Formation of share market prices under heterogeneous beliefs and common knowledge

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Author Info

  • Biondi, Yuri
  • Giannoccolo, Pierpaolo
  • Galam, Serge

Abstract

Financial economic models often assume that investors know (or agree on) the fundamental value of the shares of the firm, easing the passage from the individual to the collective dimension of the financial system generated by the Share Exchange over time. Our model relaxes that heroic assumption of one unique “true value” and deals with the formation of share market prices through the dynamic formation of individual and social opinions (or beliefs) based upon a fundamental signal of economic performance and position of the firm, the forecast revision by heterogeneous individual investors, and their social mood or sentiment about the ongoing state of the market pricing process. Market clearing price formation is then featured by individual and group dynamics that make its collective dimension irreducible to its individual level. This dynamic holistic approach can be applied to better understand the market exuberance generated by the Share Exchange over time.

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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 391 (2012)
Issue (Month): 22 ()
Pages: 5532-5545

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Handle: RePEc:eee:phsmap:v:391:y:2012:i:22:p:5532-5545

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

Related research

Keywords: Opinion dynamics; Sociophysics; Econophysics; Reaction–diffusion; Bubble formation; Market dynamics; Market price formation;

References

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Citations

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Cited by:
  1. Zhang, Ting & Li, Honggang, 2013. "Buying on margin, selling short in an agent-based market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(18), pages 4075-4082.
  2. Yuri Biondi & Simone Righi, 2013. "What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary," Papers 1312.7460, arXiv.org.
  3. Solomon Sorin & Golo Natasa, 2013. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall–Walras Disequilibrium," Accounting, Economics, and Law, De Gruyter, vol. 3(3), pages 167-260, October.
  4. Jiri Kukacka & Jozef Barunik, 2012. "Behavioural breaks in the heterogeneous agent model: the impact of herding, overconfidence, and market sentiment," Papers 1205.3763, arXiv.org, revised May 2013.
  5. Sorin Solomon & Natasa Golo, 2013. "Minsky Financial Instability, Interscale Feedback, Percolation and Marshall-Walras Disequilibrium," INET Research Notes 39, Institute for New Economic Thinking (INET).

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