FAIR PRICE AND TRADING PRICE: AN ABM APPROACH WITH ORDER-PLACEMENT STRATEGY AND MISUNDERSTANDING OF FUNDAMENTAL VALUE

Authored by Vivien Lespagnol, Juliette Rouchier

Date Published: 2015

DOI: 10.1142/s0219525915500241

Sponsors: French National Research Agency (ANR)

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

This paper studies the effect of investor's bounded rationality on market dynamics. In a call auction market, we consider a few-types model where two risky assets are traded. Agents differ by their behavior, knowledge, risk aversion and investment horizon. The investor's demand is defined by a utility maximization under constant absolute risk aversion (CARA). Relaxing the assumption of perfect knowledge of fundamentals enables to identify two components in a bubble. The first one comes from the unperceived fundamental changes due to trader's belief perseverance. The second one is generated by chartist behavior. In all simulations, speculators make the market less efficient and more volatile. They also increase the maximum amount of assets exchanged in the most liquid time step. However, our model does not show rising average volatility on long term. Concerning the fundamentalists, the belief perseverance has a stabilization impact on the spot price. The closer the anchor is to the true fundamental value, the more efficient the market is, because the prices change smoothly.

Tags

Dynamics Market Liquidity behavioral finance Returns