What Does Financial Market Do? The Formation of Share Market Prices Under Heterogeneous Beliefs and Common Knowledge

Physica A: Statistical Mechanics and its Applications, Volume 391, Issue 22, 15 November 2012, Pages 5532-5545

25 Pages Posted: 17 May 2011 Last revised: 9 Oct 2012

See all articles by Yuri Biondi

Yuri Biondi

French National Center for Scientific Research (CNRS)

Serge Galam

French National Center for Scientific Research (CNRS) - Centre for Political Research, Sciences Po

Pierpaolo Giannoccolo

University of Bologna

Date Written: July 1, 2011

Abstract

Financial economic models often assume that investors know (or agree on) the fundamental value of the shares of the firm, easing the passage from the individual to the collective dimension of the financial system generated by the Share Exchange over time. Our model relaxes that heroic assumption of one unique "true value" and deals with the formation of share market prices through the dynamic formation of individual and social opinions (or beliefs) based upon a fundamental signal of economic performance and position of the firm, the forecast revision by heterogeneous individual investors, and their social mood or sentiment about the ongoing state of the market pricing process. Market clearing price formation is then featured by individual and group dynamics that make its collective dimension irreducible to its individual level. This dynamic holistic approach can be applied to better understand the market exuberance generated by the Share Exchange over time.

Keywords: accounting information, asset pricing model, fundamentalism, chartism, large fluctuations, market exuberance, market microstructure

JEL Classification: C63, D4, M41, M48, G1

Suggested Citation

Biondi, Yuri and Galam, Serge and Giannoccolo, Pierpaolo, What Does Financial Market Do? The Formation of Share Market Prices Under Heterogeneous Beliefs and Common Knowledge (July 1, 2011). Physica A: Statistical Mechanics and its Applications, Volume 391, Issue 22, 15 November 2012, Pages 5532-5545. Available at SSRN: https://ssrn.com/abstract=1843324 or http://dx.doi.org/10.2139/ssrn.1843324

Yuri Biondi (Contact Author)

French National Center for Scientific Research (CNRS) ( email )

IRISSO - University Paris Dauphine PSL
Place Marechal Lattre Tassigny
75016 Paris
France

HOME PAGE: http://yuri.biondi.free.fr/

Serge Galam

French National Center for Scientific Research (CNRS) - Centre for Political Research, Sciences Po ( email )

98
rue de l'Université
Paris, 75007
France

Pierpaolo Giannoccolo

University of Bologna ( email )

Department of Economics
Piazza Scaravilli, 2
40125 Bologna, 40125
Italy

HOME PAGE: http://www2.dse.unibo.it/giannoccolo

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