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Itchy feet vs cool heads: Flow of funds in an agent-based financial market

Jan Palczewski, Klaus Schenk-Hoppé and Tongya Wang

Journal of Economic Dynamics and Control, 2016, vol. 63, issue C, 53-68

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.

Keywords: Portfolio management; Agent-based financial market; Evolutionary finance; Flow of funds (search for similar items in EconPapers)
JEL-codes: D53 G18 C63 (search for similar items in EconPapers)
Date: 2016
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