News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents
(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)
Please use this url to cite or link to this publication:
https://lup.lub.lu.se/record/3a998bc6-bb56-4ecc-a7ef-6f5332bbd467
- author
- Fischer, Thomas LU
- publishing date
- 2012
- 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
- 2022-02-21 23:26:01
@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}},
keywords = {{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}},
doi = {{10.3233/AF-2011-010}},
volume = {{1}},
year = {{2012}},
}