Coherent Preferences and Asset Prices in Stock Market

27 Pages Posted: 14 Oct 2019 Last revised: 24 Dec 2020

See all articles by Leilei Shi

Leilei Shi

Haitong Securities Co. Ltd.----Beijing Fuwaidajie; International Institute of Finance, School of Management, University of Science and Technology of China (USTC)

Andrea Fenu

University of San Diego; Universita di Cagliari; Boston University

Xinshuai Guo

University of Science and Technology of China (USTC) - School of Management

Bing-Hong Wang

University of Science and Technology of China (USTC) - Department of Modern Physics

Date Written: October 13, 2019

Abstract

In this paper, we study individual trading behaviors by cumulative trading volume distribution over a price range. We select intraday volume distribution as individual revealed preferences over a price range and determine beliefs by the maximum volume price in stock market. We propose a coherent preferences hypothesis in stock market where momentum, reversal, and interactive trading behaviors coexist in the framework of a price-volume probability wave differential equation. Then, we examine it by a set of explicit models of coherent preferences in interaction using tick by tick high frequency trading data of an ETF in Chinese stock market against a large number of the price-volume distributions. We evidence that subject individuals behave coherent preferences significantly. Finally, we find that individuals behave disposition effect or inverse disposition effect, and explain them by asymmetry and nonlinear coherent preferences. The bounded rational hypothesis combines individual preferences, beliefs, and cognitive limits, and has a set of unified and better models available in behavioral finance. It can help us to understand excessive price change or bubble and study nonlinear equilibrium and risk in financial market.

Keywords: coherent preferences, volume weights, price reference point, disposition and inverse disposition

JEL Classification: G40, D11, C60

Suggested Citation

Shi, Leilei and Fenu, Andrea and Guo, Xinshuai and Wang, Bing-Hong, Coherent Preferences and Asset Prices in Stock Market (October 13, 2019). Available at SSRN: https://ssrn.com/abstract=3464044 or http://dx.doi.org/10.2139/ssrn.3464044

Leilei Shi (Contact Author)

Haitong Securities Co. Ltd.----Beijing Fuwaidajie ( email )

#2010, Tower A
#2 Fuwaidajie, Xicheng District
Beijing, 100037
China
0086+18611270598 (Phone)

HOME PAGE: http://https://www.htsec.com/ChannelHome/4793976/index.shtml

International Institute of Finance, School of Management, University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China
(0086)18611270598,13671328061 (Phone)

Andrea Fenu

University of San Diego ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

Universita di Cagliari ( email )

Cagliari, 09124
Italy

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States

Xinshuai Guo

University of Science and Technology of China (USTC) - School of Management ( email )

China

Bing-Hong Wang

University of Science and Technology of China (USTC) - Department of Modern Physics ( email )

China

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