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The formation of share market prices under heterogeneous beliefs and common knowledge

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  • Yuri Biondi
  • Pierpaolo Giannoccolo
  • Serge Galam

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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File URL: http://arxiv.org/pdf/1105.3228
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Paper provided by arXiv.org in its series Papers with number 1105.3228.

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Date of creation: May 2011
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Handle: RePEc:arx:papers:1105.3228

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Web page: http://arxiv.org/

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  1. Shinichi Hirota & Shyam Sunder, 2005. "Price Bubbles sans Dividend Anchors: Evidence from Laboratory Stock Markets," ISER Discussion Paper, Institute of Social and Economic Research, Osaka University 0634, Institute of Social and Economic Research, Osaka University.
  2. Ausloos, M. & Petroni, F., 2009. "Statistical dynamics of religion evolutions," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 388(20), pages 4438-4444.
  3. Katarzyna Sznajd-Weron & Jozef Sznajd, 2000. "Opinion evolution in closed community," HSC Research Reports, Hugo Steinhaus Center, Wroclaw University of Technology HSC/00/04, Hugo Steinhaus Center, Wroclaw University of Technology.
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