Modeling Stock Price Dynamics with Fuzzy Opinion Networks

TL;DR

This paper introduces a fuzzy opinion network model for stock market dynamics, capturing how social interactions and uncertainties among investors influence prices and trend reversals.

Contribution

It develops a novel fuzzy opinion network framework modeling investor interactions and uncertainties, with proven convergence properties and practical stock market application.

Findings

Investors form groups or reach consensus depending on the reference scheme.

The model predicts trend reversals based on uncertainty spikes.

Simulations demonstrate the impact of parameters on price dynamics.

Abstract

We propose a mathematical model for the word-of-mouth communications among stock investors through social networks and explore how the changes of the investors' social networks influence the stock price dynamics and vice versa. An investor is modeled as a Gaussian fuzzy set (a fuzzy opinion) with the center and standard deviation as inputs and the fuzzy set itself as output. Investors are connected in the following fashion: the center input of an investor is taken as the average of the neighbors' outputs, where two investors are neighbors if their fuzzy opinions are close enough to each other, and the standard deviation (uncertainty) input is taken with local, global or external reference schemes to model different scenarios of how investors define uncertainties. The centers and standard deviations of the fuzzy opinions are the expected prices and their uncertainties, respectively, that are used as inputs to the price dynamic equation. We prove that with the local reference scheme the investors converge to different groups in finite time, while with the global or external reference schemes all investors converge to a consensus within finite time and the consensus may change with time in the external reference case. We show how to model trend followers, contrarians and manipulators within this mathematical framework and prove that the biggest enemy of a manipulator is the other manipulators. We perform Monte Carlo simulations to show how the model parameters influence the price dynamics, and we apply a modified version of the model to the daily closing prices of fifteen top banking and real estate stocks in Hong Kong for the recent two years from Dec. 5, 2013 to Dec. 4, 2015 and discover that a sharp increase of the combined uncertainty is a reliable signal to predict the reversal of the current price trend.