News reaction in financial markets within a behavioral finance model with heterogeneous agents

Thomas Fischer

No 205, Darmstadt Discussion Papers in Economics from Darmstadt University of Technology, Department of Law and Economics

Abstract: This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker's finite price adjustment speed leads to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. Chartist can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Furthermore, noise in financial markets can lead to long time decoupling from fundamental value. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed.

Keywords: Heterogeneous; Agent; Model; stock market; under and overreaction to news; moving average rules; financial stability (search for similar items in EconPapers)
JEL-codes: C15 C62 D84 G14 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents (2012)
Working Paper: News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents (2011)
Working Paper: News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:darddp:dar_54196

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