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Inferring Trend-Following and Contrarian Behavior from Price Dynamics

Article arXiv papers · Author: V. Alfi et al.
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Summary

The document describes a model for analyzing price movements in terms of effective forces associated with trend-following and trend-adverse traders. Its purpose is to infer which type of behavior is prevailing over a chosen interval, rather than to prescribe a trading rule. The method is tested first on data from a minority-majority game, where the inferred behavior can be compared with the strategies represented in the model.

The authors also apply the approach to NYSE stock prices and report that it can provide an indication of market sentiment for intervals of at least one day. The description does not specify the estimator, calibration procedure, stock sample, or quantitative accuracy, so the evidence is limited to the stated model test and market application. The inferred forces should be understood as an indication of aggregate behavior, not direct observation of individual traders or proof of a causal trading mechanism.

Key ideas

  • Price changes are modeled as reflecting effective forces associated with trend-following or trend-adverse strategies.
  • The method aims to identify which type of strategy predominates during a selected interval.
  • A minority-majority game provides a test case for reconstructing the strategies present in the model.
  • The NYSE application suggests the method can indicate market sentiment over intervals of at least one day.

Tags

EquitiesSentimentTrend followingMean reversionStatistics
Full text
# Detecting the traders' strategies in Minority-Majority games and real stock-prices


# Detecting the traders' strategies in Minority-Majority games and real stock-prices









Price dynamics is analyzed in terms of a model which includes the possibility of effective forces due to trend followers or trend adverse strategies. The method is tested on the data of a minority-majority model and indeed it is capable of reconstructing the prevailing traders' strategies in a given time interval. Then we also analyze real (NYSE) stock-prices dynamics and it is possible to derive an indication for the the ``sentiment'' of the market for time intervals of at least one day.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.