Abstract
In March 2020, four consecutive circuit breakers in the US stock market underscored the impact of investor sentiment on the stock market. With the development of technology, public opinion and other information now spread easily through social media and other channels, indirectly affecting investor sentiment. This makes it important to understand the underlying dynamics of such situations to help manage the market impact of such events going forward. To that end, we analyze investor sentiment, investor structures, and the capital market fuse mechanism using infectious disease dynamics. We use an extension of the SIR (susceptible, infectious, and recovered) model, called the dynamic SIRS model (where individuals return to a susceptible state), to simulate the impact of investor sentiment on the stock market. Accordingly, we study the circuit breakers in the US stock market and the simulation results of the model to analyze the fuse mechanism process in China that triggers a pause in the market based on volatile trading. The results of our study show that when the influence rate of investor mutual communication increases or when the emotional calm rate decreases, investor emotions will start to diffuse, leading to an increase in the probability of either a serious stampede or zealous overbuying in the stock market. At the same time, the trading frequency of investors and the ratio of investors in both buying and selling directions will have a certain formal impact on the direction of the stock market, with the final impact determined by the ratio of normal investors to emotional investors. When emotional investors dominate the market, their emotions are diffused throughout. Our study provides the reference for relevant agencies to monitor and improve the stock market fuse mechanism in the future.
Highlights
Following the stock market crash of 1987, US regulators put the first circuit breakers in place to prevent the repetition of a swift plunge in the Dow Jones Industrial Average
We use an extension of the SIR model, called the dynamic SIRS model, to simulate the impact of investor sentiment on the stock market
1 0 100 200 300 400 500 600 700 800 900 t 80% exotional investors 50% exotional investors 30% exotional investors sentiment, such as Twitter, Facebook, Baidu post bar, WeChat, or TikTok, affecting the overall market, and affecting individual stocks. It can have a greater impact on individual stocks, such as GameStop (GME.US) which had risen 92.71% and 134.84% in two days in the US and Teli A (000025.SZ) which had risen 15 times trading limited in 17 days in China. us, both the fuse mechanism and bull market behavior are influenced by investor sentiment
Summary
Following the stock market crash of 1987, US regulators put the first circuit breakers in place to prevent the repetition of a swift plunge in the Dow Jones Industrial Average. Is fuse mechanism, which stops trading to give the market room to recover and calm down, gives regulatory authorities time to take relevant risk control measures before continuing with trading. E fuse mechanism has been put in place for foreign exchanges and the three major exchanges in China, where it was triggered during the trading of China’s A-shares between January 1 and January 8, 2016. E use of the four circuit breakers in the US stocks in March 2020 and the two circuit breakers in China’s A-shares in 2016 reinforce the importance of controlling risks in the capital market. We combine the simulation results of the model and study the US stock circuit breakers and the China A-shares fusing process to provide a reference for the relevant agencies to monitor and improve the fuse mechanism going forward
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