
arXiv: 1109.6909
Human decision making by professionals trading daily in the stock market can be a daunting task. It includes decisions on whether to keep on investing or to exit from a market subject to huge price swings, and also how to price in news or rumors attributed to a specific stock. The question then arises how professional traders, who specialize in daily buying and selling large amounts of a given stock, know how to properly price a given stock on a given day. Here we introduce the idea that people use heuristics, or “rules of thumb”, in terms of “yard sticks” from the performance of the other stocks in a stock index. The under or over performance with respect to such a yard stick then signifies a general negative or positive sentiment of the market participants towards a given stock. Using empirical data of the Dow Jones Industrial Average, stocks are shown to have daily performances with a clear tendency to cluster around the measures introduced by the yard sticks. We illustrate how sentiments, most likely due to insider information, can influence the performance of a given stock over period of months, and in one case years.
Physics - Physics and Society, 330, sentiments, dimensional analysis, FOS: Physical sciences, Physics and Society (physics.soc-ph), [SHS.ECO]Humanities and Social Sciences/Economics and Finance, FOS: Economics and business, Behavioural Finance, CAPM, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, Quantitative Finance - General Finance, General Finance (q-fin.GN)
Physics - Physics and Society, 330, sentiments, dimensional analysis, FOS: Physical sciences, Physics and Society (physics.soc-ph), [SHS.ECO]Humanities and Social Sciences/Economics and Finance, FOS: Economics and business, Behavioural Finance, CAPM, [SHS.ECO] Humanities and Social Sciences/Economics and Finance, Quantitative Finance - General Finance, General Finance (q-fin.GN)
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