Preferences, Belief Formation, and Market Dynamic Equilibrium in Trading When the Interaction of Traders Is Coherent
58 Pages Posted: 20 Apr 2017 Last revised: 14 Oct 2021
Date Written: October 12, 2021
Preferences are intelligent, adaptive, and cooperative choices over price in trading if the interaction of traders is coherent in stock market. It justifies market dynamic equilibrium without the criterion of rationality. We select intraday cumulative trading volume distribution over the price as revealed preferences while an equilibrium price in beliefs is the price at which the corresponding cumulative trading volume achieves a maximum value. We examine a trading preference hypothesis in market dynamic equilibrium using tick-by-tick high frequency data in Chinese stock market, and account for local dynamic equilibrium and overall dynamic disequilibrium in financial market. Moreover, we have an explicit mathematical expression for nonlinear V-shaped price reversal trading over price and explain actually nonlinear V-shaped probability of selling as a function of profit by the behavior of interactive traders. Our study suggests that a behavioral financial economics theory realizing both descriptively accurate and normatively adequate goals can be extracted from a price-volume probability wave equation in the future.
Keywords: Trading Preferences; Interactive Coherence; Interactive Trader; Local Equilibrium; Overall Disequilibrium; Volume Distribution over Price
JEL Classification: D01; C60; G40; D91
Suggested Citation: Suggested Citation