A1274
Title: Analysing financial herding through network analysis
Authors: Muhamed Alsharman - Bath University (United Kingdom) [presenting]
Richard Fairchild - University of Bath (United Kingdom)
Neal Hinvest - Bath University (United Kingdom)
Abstract: Emotional Finance introduces the notion that financial markets may be driven by the co-existence of fully-rational and emotional investors, driven by phantasy. The analysis of emotional finance is informed with reference to a Freudian psychoanalytical framework. We add to the existing information cascade and herding research by developing an emotional finance model that examines the effects of phantasy investors on the decisions of rational investors under dynamic pricing. We consider a financial market for a risky asset in which the traders emotions develop overtime based on how they perform. We propose an elementary agent-based asset pricing model consisting of three trader types; fundamental traders, emotional traders, and semi-emotional traders. The model comprises two features: 1) an emotional herding mechanism based on susceptible-infected susceptible (SIS) model 2) wealth price herding based on wealth preferential attachment. Combining analytical and simulation methods, the interaction between these elements is studied in a 4-phase plane of the price movement: 1) prices resembling a bull market 2) prices resembling a bear market 3) U-shaped pricing trends, and 4) n shaped pricing trends. Finally, we compare our approach with a traditional information cascade/herding model incorporating phantasy investors
