Sentiment-Driven Speculation in Financial Markets with Heterogeneous Beliefs: a Machine Learning approach *
41 Pages Posted: 1 May 2023
Date Written: April 26, 2023
Abstract
We study an heterogenous asset pricing model in which different classes of investors coexist and evolve, switching among strategies over time according to a fitness measure. In the presence of boundedly rational agents, with biased forecasts and trend following rules, we study the effect of two types of speculation: one based on fundamentalist and the other on rational expectations. While the first is only based on knowledge of the asset underlying dynamics, the second takes also into account the behavior of other investors. We bring the model to data by estimating it on the Bitcoin Market with two contributions. First, we construct the Bitcoin Twitter Sentiment Index (BiTSI) to proxy a time varying bias. Second, we propose a new method based on a Neural Network, for the estimation of the resulting heterogeneous agent model with rational speculators. We show that the switching finds support in the data and that while fundamentalist speculation amplifies volatility, rational speculation has a stabilizing effect on the market.
Keywords: Asset Pricing, Heursitic Switching Model, Machine Learning. JEL Classification: C63, D84, E32, E44, G12
JEL Classification: C63, D84, E32, E44, G12
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