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Optimal investment strategies for emotionally driven investors in the stock market

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  • Yang, Yang
  • Nian, Fuzhong
  • Liu, Xinghao

Abstract

Investor sentiment is a major driver of stock price volatility. To analyze its impact on trading behavior and strategic decision-making, an SVR (Spreader–Vulnerable–Recovered) group sentiment contagion model is developed, integrating viewpoint dynamics and epidemic theory. The evolution of investor populations across time and sentiment intensity is examined. The findings show that sentiment intensity governs the emotional orientation of homogeneous groups, and despite individual variations, the market tends to stabilize. Applied to real data from four stocks, the model uses a sentiment intensity estimator, ϕ, to simulate the dynamic sentiment–price relationship and identify optimal decision paths. Results suggest that a shift in ϕ from negative to positive signals growing optimism; however, due to sentiment lag, maintaining positions and buying on dips is recommended. Conversely, when ϕ turns from positive to negative, bearish sentiment prevails, suggesting immediate position reduction. In summary, the model aids in measuring market sentiment and anticipating trend changes, offering practical insights for investors.

Suggested Citation

  • Yang, Yang & Nian, Fuzhong & Liu, Xinghao, 2026. "Optimal investment strategies for emotionally driven investors in the stock market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 682(C).
    • Handle: RePEc:eee:phsmap:v:682:y:2026:i:c:s037843712500799x
    DOI: 10.1016/j.physa.2025.131147
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