Data Mining for Overreaction in Financial Markets

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

8 Pages Posted: 1 Jun 2009 Last revised: 5 Jun 2009

Ahmet Duran

University of Michigan at Ann Arbor

Gunduz Caginalp

University of Pittsburgh - Department of Mathematics

Date Written: April 12, 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 Classification: G12, C12, C22, C23, C53, C63, C87, D03, D46, D52

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: https://ssrn.com/abstract=1412404

Ahmet Duran (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
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)

Paper statistics

Downloads
696
Rank
28,583
Abstract Views
2,250