Kiel Working Papers, Kiel Institute for World Economics
No 1514:
Mass Psychology in Action: Identification of Social Interaction Effects in the German Stock Market
Thomas Lux
Abstract: We use weekly survey data on short-term and medium-term
sentiment of German investors to estimate the parameters of a stochastic
model of opinion dynamics. The bivariate nature of our data set also allows
us to explore the interaction between the two hypothesized opinion
formation processes, while consideration of the simultaneous weekly changes
of the stock index DAX enables us to study the influence of sentiment on
returns within a behavioral model of boundedly rational traders.
Technically, we extend the maximum likelihood framework for parameter
estimation in agent-based models introduced by Lux (2009a) by generalizing
it to bivariate and trivariate settings. As it turns out, short-term
sentiment is governed by strong social interaction with abrupt changes of
direction while medium-term sentiment is a slowly moving process with more
moderate social interaction. The trivariate model can potentially predict
stock returns out-of-sample on the base of medium-run sentiment at least if
an apparently spurious influence from short-run sentiment is discarded
Keywords: Opinion formation, social interaction, investor sentiment; (follow links to similar papers)
JEL-Codes: G12,; D84; (follow links to similar papers)
42 pages, April 2009
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