Sentiment-Driven Speculation in Financial Markets with Heterogeneous Beliefs: a Machine Learning approach *

41 Pages Posted: 1 May 2023

See all articles by Tommaso Di Francesco

Tommaso Di Francesco

University of Amsterdam - CeNDEF; Università Ca' Foscari Venezia - Department of Economics

Cars H. Hommes

Government of Canada - Bank of Canada; CeNDEF, Amsterdam School of Economics, University of Amsterdam; Tinbergen Institute

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

Suggested Citation

Di Francesco, Tommaso and Hommes, Cars H., Sentiment-Driven Speculation in Financial Markets with Heterogeneous Beliefs: a Machine Learning approach * (April 26, 2023). Available at SSRN: https://ssrn.com/abstract=4429858 or http://dx.doi.org/10.2139/ssrn.4429858

Tommaso Di Francesco (Contact Author)

University of Amsterdam - CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

Università Ca' Foscari Venezia - Department of Economics ( email )

Venice
Italy

Cars H. Hommes

Government of Canada - Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

CeNDEF, Amsterdam School of Economics, University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://https://www.uva.nl/en/profile/h/o/c.h.hommes/c.h.hommes.html

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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