How the heterogeneity in investment horizons affects market trends
Authored by Daye Li, Rongrong Li, Qiankun Sun
Date Published: 2017
DOI: 10.1080/00036846.2016.1218433
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Abstract
To investigate the relationship between the liquidity and the divergent
degree of heterogeneous investors with different investment horizons, we
propose an agent-based model based on the assumptions of the fractal
market hypothesis. A laboratory market is used to investigate the impact
of the divergent degree on the stability of the financial market.
Simulation results indicate that the market becomes more stable as
investors become increasingly divergent and are more likely to absorb
the orders of the other side and maintain a narrow trade gap. Moreover,
with highly heterogeneous investors, the market is more efficient, less
liable to crash and less volatile. The simulation, based on the
agent-based model, demonstrates that the interactions and herding
behaviours of investors lead to a market crash when the divergent
structure shrinks and only limited investment horizons are available.
The result also suggests an alternate explanation of the anomaly of
efficient market hypothesis, which shows why the momentum and contrarian
strategies can earn excess returns in the short term and the long term,
respectively. It also verifies the hypothesis that heterogeneous
investors with different investment horizons provide market liquidity.
Tags
Agent-based model
Liquidity
investors
Volatility
Financial-markets
Market anomaly
Investment horizons
Price changes