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Investor sentiment and trading behavior

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  • Giovanni Campisi
  • Silvia Muzzioli

Abstract

The aim of this paper is to model trading decisions of ï¬ nancial investors based on a sentiment index. For this purpose, we analyse a dynamical model which includes the sentiment index in the agents’ trading behavior. We consider the set up of a Discrete Dynamical System, assuming that in ï¬ nancial markets transactions take place between two groups of fundamentalists that differ in their perception of fundamental value. The proportion of fundamentalists in the two groups is assumed to depend on the sentiment index. The sentiment index used is related to the risk asymmetry index (RAX) enabling us to consider both the variance and the asymmetry of the prediction error between the two groups of fundamentalists. We identify the equilibria of the model and conduct a numerical analysis in order to capture stylized facts documented empirically in the ï¬ nancial literature.

Suggested Citation

  • Giovanni Campisi & Silvia Muzzioli, 2020. "Investor sentiment and trading behavior," Department of Economics 0163, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    • Handle: RePEc:mod:depeco:0163
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    Cited by:

    1. Giovanni Campisi & Silvia Muzzioli & Fabio Tramontana, 2021. "Uncertainty about fundamental, pessimistic and overconfident traders: a piecewise-linear maps approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 707-726, December.
    2. Giovanni Campisi & Silvia Muzzioli & Fabio Tramontana, 2021. "Uncertainty about fundamental and pessimistic traders: a piecewise-linear maps approach," Department of Economics 0186, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".
    3. Giovanni Campisi & Silvia Muzzioli, 2020. "Fundamentalists heterogeneity and the role of the sentiment indicator," Department of Economics 0167, University of Modena and Reggio E., Faculty of Economics "Marco Biagi".

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