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News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents

Fischer, Thomas LU (2012) In Algorithmic Finance 1(2). p.123-139
Abstract
This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker’s finite price adjustment speed and the presence of risk aversion lead to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. They can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality... (More)
This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker’s finite price adjustment speed and the presence of risk aversion lead to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. They can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed. (Less)
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author
publishing date
type
Contribution to journal
publication status
published
subject
keywords
heterogeneous agent model, stock market, under and overreaction to news, moving average rules, financial stability
in
Algorithmic Finance
volume
1
issue
2
pages
17 pages
publisher
IOS Press
external identifiers
  • scopus:84932637664
ISSN
2157-6203
DOI
10.3233/AF-2011-010
language
English
LU publication?
no
id
3a998bc6-bb56-4ecc-a7ef-6f5332bbd467
date added to LUP
2017-01-10 10:50:20
date last changed
2017-04-23 04:56:49
@article{3a998bc6-bb56-4ecc-a7ef-6f5332bbd467,
  abstract     = {This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker’s finite price adjustment speed and the presence of risk aversion lead to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. They can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed.},
  author       = {Fischer, Thomas},
  issn         = {2157-6203},
  keyword      = {heterogeneous agent model,stock market,under and overreaction to news,moving average rules,financial stability},
  language     = {eng},
  number       = {2},
  pages        = {123--139},
  publisher    = {IOS Press},
  series       = {Algorithmic Finance},
  title        = {News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents},
  url          = {http://dx.doi.org/10.3233/AF-2011-010},
  volume       = {1},
  year         = {2012},
}