Modelling the Short Term Herding Behaviour of Stock Markets

Shapira Y, Berman Y, Ben-Jacob E. Modelling the short term herding behaviour of stock markets. New Journal of Physics. 2014 May 21;16(5):053040.

17 Pages Posted: 13 Jun 2016

See all articles by Yoash Shapira

Yoash Shapira

Tel Aviv University

Yonatan Berman

London Mathematical Laboratory

Eshel Ben-Jacob

Tel Aviv University (Deceased)

Date Written: May 21, 2014

Abstract

Modelling the behaviour of stock markets has been of major interest in the past century. The market can be treated as a network of many investors reacting in accordance to their group behaviour, as manifested by the index and effected by the flow of external information into the system. Here we devise a model that encapsulates the behaviour of stock markets. The model consists of two terms, demonstrating quantitatively the effect of the individual tendency to follow the group and the effect of the individual reaction to the available information. Using the above factors we were able to explain several key features of the stock market: the high correlations between the individual stocks and the index; the Epps effect; the high fluctuating nature of the market, which is similar to real market behaviour. Furthermore, intricate long term phenomena are also described by this model, such as bursts of synchronized average correlation and the dominance of the index as demonstrated through partial correlation.

Keywords: econophysics, market herd behavior, Epps effect, stock market modelling

Suggested Citation

Shapira, Yoash and Berman, Yonatan and Ben-Jacob, Eshel, Modelling the Short Term Herding Behaviour of Stock Markets (May 21, 2014). Shapira Y, Berman Y, Ben-Jacob E. Modelling the short term herding behaviour of stock markets. New Journal of Physics. 2014 May 21;16(5):053040.. Available at SSRN: https://ssrn.com/abstract=2794814

Yoash Shapira

Tel Aviv University ( email )

Ramat Aviv
Tel-Aviv, 6997801
Israel

Yonatan Berman (Contact Author)

London Mathematical Laboratory

8 Margravine Gardens
London, London W6 8RH
United Kingdom

Eshel Ben-Jacob

Tel Aviv University (Deceased)

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