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Data Mining for Overreaction in Financial Markets

Ahmet Duran
University of Michigan at Ann Arbor

Gunduz Caginalp
University of Pittsburgh - Department of Mathematics

PROCEEDINGS OF THE IASTED INTERNATIONAL CONFERENCE ON SOFTWARE ENGINEERING AND APPLICATIONS (SEA), Phoenix, AZ, November 14-16, 2005, W.-T. Tsai and M.H. Hamza, eds., Vol. 467, pp. 28-35, ACTA Press, 2005

Abstract:
We study overreaction and the cumulative effect of the consecutive local overreaction patterns in financial markets. The 'overreaction diamond' pattern [1] is one of the key components of a financial market bubble. The cumulative effect of the consecutive short term overreactions arising from the deviation of stock prices from their fundamentals can be explained by attribution theory, feedback traders, affect and representativeness theories, and reference points in investments. We study large set of financial data and propose a data mining method by exploiting the relative cumulative sentiment of the investors. This leads to a potential for the implementation of suitable algorithms and the preparation of software packages that can be useful for prediction of various stages of overreaction and bubbles.

Keywords: data mining, overreaction, computational finance software, financial bubble, prediction, financial markets

JEL Classifications: G12, C12, C22, C23, C53, C63, C87, D03, D46, D52

Accepted Paper Series

Date posted: June 01, 2009 ; Last revised: June 05, 2009

Suggested Citation

Duran, Ahmet and Caginalp, Gunduz, Data Mining for Overreaction in Financial Markets (April 12, 2005). PROCEEDINGS OF THE IASTED INTERNATIONAL CONFERENCE ON SOFTWARE ENGINEERING AND APPLICATIONS (SEA), Phoenix, AZ, November 14-16, 2005, W.-T. Tsai and M.H. Hamza, eds., Vol. 467, pp. 28-35, ACTA Press, 2005. Available at SSRN: http://ssrn.com/abstract=1412404

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Contact Information

Ahmet Duran (Contact Author) University of Michigan at Ann Arbor ( email ) Ann Arbor, MI 48109 United States
Gunduz Caginalp University of Pittsburgh - Department of Mathematics ( email ) 507 Thackeray Hall Pittsburgh, PA 15260 United States 412-624-8339 (Phone) 412-624-8397 (Fax)