Itchy feet vs cool heads: Flow of funds in an agent-based financial market
Authored by Jan Palczewski, Klaus Reiner Schenk-Hoppe, Tongya Wang
Date Published: 2016
DOI: 10.1016/j.jedc.2015.12.002
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Abstract
Investors tend to move funds when they are unhappy with their current
portfolio managers' performance. We study the effect of the size of this
flow of funds in an agent-based model of the financial market. The model
combines the discrete choice approach from agent-based modelling, where
all capital is mobile, with the evolutionary finance framework where all
growth is endogenous. Our results show that, if investors exhibit
recency bias in evaluating portfolio managers' performance, even a small
amount of freely flowing capital has a huge impact on the market
dynamics and the survival of noise traders. We also find that investors'
intensity of choice is a driving force for excess volatility and extreme
price movements when the size of the flow of funds is large. (C) 2016
Elsevier B.V. All rights reserved.
Tags
Evolution
behavior
Heterogeneity
Model
Beliefs
Rules
Stock-market
Asset price dynamics