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
Date Written: January 11, 2020
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: Suggested Citation