Predictable markets? A news-driven model of the stock market

TL;DR

This paper introduces a model of stock market dynamics driven by interactions among market price, investor opinion, and information flow, demonstrating its ability to replicate observed market behaviors across various timescales.

Contribution

It presents a novel framework and model for understanding stock market dynamics through the interaction of key variables, supported by empirical and theoretical analysis.

Findings

Model replicates observed market behavior on multiple timescales

Provides insights into market predictability and investor behavior

Suggests implications for market theory and practical applications

Abstract

We attempt to explain stock market dynamics in terms of the interaction among three variables: market price, investor opinion and information flow. We propose a framework for such interaction and apply it to build a model of stock market dynamics which we study both empirically and theoretically. We demonstrate that this model replicates observed market behavior on all relevant timescales (from days to years) reasonably well. Using the model, we obtain and discuss a number of results that pose implications for current market theory and offer potential practical applications.