Wavelets and Sentiment in the Heterogeneous Agents Model

The paper concerns a heterogeneous agent model, which is an extension of the Brock and Hommes model. The heterogeneous agents approach challenges the traditional representative rational agent framework. Heterogeneity in expectations can lead to market instability and complicated price dynamics. In our paper we introduce the concept of the sentiment change. We use wavelets for frequency detection in price time series analysis. We show that the application of the sentiment change on financial markets provides a new possibility for the incorporation of the behavioral approach into the theoretical financial market model.