Confidence and the Stock Market: An Agent-Based Approach |
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| Authors: | Mario A Bertella Felipe R Pires Ling Feng Harry Eugene Stanley |
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| Institution: | 1. Department of Economics, Sao Paulo State University (UNESP), Sao Paulo, Brazil.; 2. Center for Polymer Studies and Department of Physics, Boston University, Boston, Massachusetts, United States of America.; 3. Companhia do Metropolitano de Sao Paulo,Sao Paulo, Brazil.; 4. Department of Physics and Centre for Computational Science and Engineering, National University of Singapore, Singapore, Singapore.; University of Maribor, Slovenia, |
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| Abstract: | Using a behavioral finance approach we study the impact of behavioral bias. We construct an artificial market consisting of fundamentalists and chartists to model the decision-making process of various agents. The agents differ in their strategies for evaluating stock prices, and exhibit differing memory lengths and confidence levels. When we increase the heterogeneity of the strategies used by the agents, in particular the memory lengths, we observe excess volatility and kurtosis, in agreement with real market fluctuations—indicating that agents in real-world financial markets exhibit widely differing memory lengths. We incorporate the behavioral traits of adaptive confidence and observe a positive correlation between average confidence and return rate, indicating that market sentiment is an important driver in price fluctuations. The introduction of market confidence increases price volatility, reflecting the negative effect of irrationality in market behavior. |
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