Escaping the Brownian stalkers

TL;DR

This paper introduces a simple three-particle model for long-term investor behavior in stock markets, analyzing how opinion dynamics influence market stability and the conditions for recurrent or transient price-opinion distances.

Contribution

It presents a novel stochastic model linking trader opinions and stock prices, analyzing stability through recurrence and transience of opinion distances.

Findings

Market stability depends on the opinion update speed parameter γ.

The opinion distance process is recurrent for certain γ values.

The opinion distance process is transient for other γ values.

Abstract

We propose a simple model for the behaviour of longterm investors on a stock market, consisting of three particles, which represent the current price of the stock and the opinion of the buyers, respectively sellers, about the right trading price. As time evolves, both groups of traders update their opinions with respect to the current price. The update speed is controled by a parameter $\gamma$, the price process is described by a geometric Brownian motion. We consider the stability of the market in terms of the distance between the buyers' and sellers' opinion, and prove that the distance process is recurrent/transient in dependence on $\gamma$.