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Stock correlations is crucial to asset pricing, investor decision-making, andfinancial risk regulations. However, microscopic explanation based onagent-based modeling is still lacking. We here propose a model derived fromminority game for modeling stock correlations, in which an agent's expectedreturn for one stock is influenced by the historical return of the other stock.Each agent makes a decision based on his expected return with reference toinformation dissemination and the historical return of the stock. We find thatthe returns of the stocks are positively (negatively) correlated when agents'expected returns for one stock are positively (negatively) correlated with thehistorical return of the other. We provide both numerical simulations andanalytical studies and give explanations to stock correlations for cases withagents having either homogeneous or heterogeneous expected returns. The resultstill holds when other factors such as holding decisions and external eventsare included which broadens the practicability of the model.

Modelling stock correlations with expected returns from investors