Fundamentals unknown: Momentum, mean-reversion and price-to-earnings trading in an artificial stock market

Joeri Schasfoort and Christopher Stockermans

No 2017-63, Economics Discussion Papers from Kiel Institute for the World Economy (IfW Kiel)

Abstract: The use of fundamentalist traders in the stock market models is problematic since fundamental values in the real world are unknown. Yet, in the literature to date, fundamentalists are often required to replicate key stylized facts. The authors present an agent-based model of the stock market in which the fundamental value of the asset is unknown. They start with a zero intelligence stock market model with a limit-order-book. Then, the authors add technical traders which switch between a simple momentum and mean reversion strategy depending on its relative profitability. Technical traders use the price to earnings ratio as a proxy for fundamentals. If price to earnings are either too high or too low, they sell or buy, respectively.

Keywords: Agent-based modelling; financial markets; technical and fundamental analysis; asset pricing (search for similar items in EconPapers)
JEL-codes: C63 D53 D84 G12 G17 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cmp, nep-fmk, nep-mst and nep-ore
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifwedp:201763

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