Coherent Preferences in Stock Market

Abstract

In this paper, we study individual trading behaviors by cumulative trading volume distribution over a price range. We select intraday volume distribution as individual revealed preferences over a price range and determine beliefs by the maximum volume price in stock market. We propose a coherent preferences hypothesis in stock market where momentum, reversal, and interactive trading behaviors coexist in the framework of a price-volume probability wave differential equation. Then, we examine it by a set of explicit models of coherent preferences in interaction using tick by tick high frequency trading data of an ETF in Chinese stock market against a large number of the price-volume distributions. We evidence that subject individuals behave coherent preferences significantly. Finally, we find that individuals behave disposition effect or inverse disposition effect, and explain them by asymmetry and nonlinear coherent preferences. The bounded rational hypothesis combines individual preferences, beliefs, and cognitive limits, and has a set of unified and better models available in behavioral finance. It can help us to understand excessive price change or bubble and study nonlinear equilibrium and risk in financial market.