A Price Dynamic Equilibrium Model with Trading Volume Weights Based on a Price-Volume Probability Wave Differential Equation

66 Pages Posted: 2 Dec 2019 Last revised: 13 Jan 2020

See all articles by Leilei Shi

Leilei Shi

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

Bing-Hong Wang

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

Xinshuai Guo

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

Honggang Li

Beijing Normal University (BNU) - School of Systems Science

Date Written: January 11, 2020

Abstract

In view of liquidity constrains and cognitive limits, we construct an individual trading constraint utility function to study intraday dynamic equilibrium in stock market. We select an intraday cumulative trading volume distribution over a price range for individual mental representation and determine a price equilibrium point by the maximum volume price. We propose the hypothesis that a stock price can deviate away from the price equilibrium point in momentum and restore to it in reversal, and the trading volume distribution embodies the market dynamic equilibrium. Based on a price-volume probability wave differential equation, we develop a set of explicit price dynamic equilibrium models with trading volume weights in a friction market and have its conditions. We measure momentum trading, reversal trading, and interactive trading. Then, we examine the market dynamic equilibrium hypothesis by the models using tick by tick high frequency data in Chinese A shares stock market in 2019. It holds true. We can infer that the theory is applied for a broader scope because it embraces major mathematical components in expected utility theory, prospect theory, and reflexivity theory.

Keywords: Behavioral Finance Theory, Mathematical Method, Dynamic Equilibrium, Volume Distribution over Price, Momentum and Reversal

JEL Classification: G40, C61, D53

Suggested Citation

Shi, Leilei and Wang, Bing-Hong and Guo, Xinshuai and Li, Honggang, A Price Dynamic Equilibrium Model with Trading Volume Weights Based on a Price-Volume Probability Wave Differential Equation (January 11, 2020). Available at SSRN: https://ssrn.com/abstract=3496068

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

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

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

Bing-Hong Wang

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

China

Xinshuai Guo

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

China

Honggang Li

Beijing Normal University (BNU) - School of Systems Science ( email )

Beijing
China

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