On possible origins of trends in financial market price changes

TL;DR

This paper explores how trends in financial markets can originate from dealer psychology and information limitations, using a deterministic threshold model to explain the inevitability of trends.

Contribution

It introduces a threshold model demonstrating that small mood changes and information constraints can generate and make trends inevitable in financial markets.

Findings

Trends can arise from minor dealer mood shifts.

Information inaccuracies make trend emergence unavoidable.

Both fundamental and non-fundamental factors contribute to trends.

Abstract

We investigate possible origins of trends using a deterministic threshold model, where we refer to long-term variabilities of price changes (price movements) in financial markets as trends. From the investigation we find two phenomena. One is that the trend of monotonic increase and decrease can be generated by dealers' minuscule change in mood, which corresponds to the possible fundamentals. The other is that the emergence of trends is all but inevitable in the realistic situation because of the fact that dealers cannot always obtain accurate information about deals, even if there is no influence from fundamentals and technical analyses.