Belief aggregation in financial markets and the nature of price fluctuations
We present a model of financial markets, where the belief of the market, expressed by a normal distribution over asset returns, is formed by aggregating in a dynamically consistent way individual subjective beliefs of the market participants, which are likewise assumed to follow normal distributions...
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| Format: | Book Section |
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Springer International Publishing
2015
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| Online Access: | https://eprints.nottingham.ac.uk/29892/ |
| _version_ | 1848793873958043648 |
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| author | Schoch, Daniel |
| author2 | Huynh, Van-Nam |
| author_facet | Huynh, Van-Nam Schoch, Daniel |
| author_sort | Schoch, Daniel |
| building | Nottingham Research Data Repository |
| collection | Online Access |
| description | We present a model of financial markets, where the belief of the market, expressed by a normal distribution over asset returns, is formed by aggregating in a dynamically consistent way individual subjective beliefs of the market participants, which are likewise assumed to follow normal distributions. We apply this model to a market of traders with standard CARA preferences with the aim of identifying an intrinsic source of price fluctuations. We find that asset prices depend on both Gaussian parameters mean and variance of the market belief, but argue that the latter changes slower than the former. Consequently, price fluctuations are dominated by the covariance matrix of the market participants’ subjective beliefs about expected asset returns. |
| first_indexed | 2025-11-14T19:07:13Z |
| format | Book Section |
| id | nottingham-29892 |
| institution | University of Nottingham Malaysia Campus |
| institution_category | Local University |
| last_indexed | 2025-11-14T19:07:13Z |
| publishDate | 2015 |
| publisher | Springer International Publishing |
| recordtype | eprints |
| repository_type | Digital Repository |
| spelling | nottingham-298922020-05-04T20:11:51Z https://eprints.nottingham.ac.uk/29892/ Belief aggregation in financial markets and the nature of price fluctuations Schoch, Daniel We present a model of financial markets, where the belief of the market, expressed by a normal distribution over asset returns, is formed by aggregating in a dynamically consistent way individual subjective beliefs of the market participants, which are likewise assumed to follow normal distributions. We apply this model to a market of traders with standard CARA preferences with the aim of identifying an intrinsic source of price fluctuations. We find that asset prices depend on both Gaussian parameters mean and variance of the market belief, but argue that the latter changes slower than the former. Consequently, price fluctuations are dominated by the covariance matrix of the market participants’ subjective beliefs about expected asset returns. Springer International Publishing Huynh, Van-Nam Kreinovich, Vladik Sriboonchitta, Songsak Suriya, Komsan 2015 Book Section PeerReviewed Schoch, Daniel (2015) Belief aggregation in financial markets and the nature of price fluctuations. In: Econometrics of risk. Studies in computational intelligence (583). Springer International Publishing, Cham, pp. 75-84. ISBN 9783319134482 http://link.springer.com/chapter/10.1007%2F978-3-319-13449-9_6 doi:10.1007/978-3-319-13449-9 doi:10.1007/978-3-319-13449-9 |
| spellingShingle | Schoch, Daniel Belief aggregation in financial markets and the nature of price fluctuations |
| title | Belief aggregation in financial markets and the nature of price fluctuations |
| title_full | Belief aggregation in financial markets and the nature of price fluctuations |
| title_fullStr | Belief aggregation in financial markets and the nature of price fluctuations |
| title_full_unstemmed | Belief aggregation in financial markets and the nature of price fluctuations |
| title_short | Belief aggregation in financial markets and the nature of price fluctuations |
| title_sort | belief aggregation in financial markets and the nature of price fluctuations |
| url | https://eprints.nottingham.ac.uk/29892/ https://eprints.nottingham.ac.uk/29892/ https://eprints.nottingham.ac.uk/29892/ |