An agent-based model of stock markets incorporating momentum investors

Authored by J. P. Huang, J. R. Wei, P. M. Hui

Date Published: 2013-06-15

DOI: 10.1016/j.physa.2013.02.011

Sponsors: Chinese National Natural Science Foundation

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

It has been widely accepted that there exist investors who adopt momentum strategies in real stock markets. Understanding the momentum behavior is of both academic and practical importance. For this purpose, we propose and study a simple agent-based model of trading incorporating momentum investors and random investors. The random investors trade randomly all the time. The momentum investors could be idle, buying or selling, and they decide on their action by implementing an action threshold that assesses the most recent price movement. The model is able to reproduce some of the stylized facts observed in real markets, including the fat-tails in returns, weak long-term correlation and scaling behavior in the kurtosis of returns. An analytic treatment of the model relates the model parameters to several quantities that can be extracted from real data sets. To illustrate how the model can be applied, we show that real market data can be used to constrain the model parameters, which in turn provide information on the behavior of momentum investors in different markets. (c) 2013 Elsevier B.V. All rights reserved.

Tags

Agent-based modeling econophysics Complex systems