An agent-based model of stock markets incorporating momentum investors

J.R. Wei, J.P. Huang and P.M. Hui

Physica A: Statistical Mechanics and its Applications, 2013, vol. 392, issue 12, 2728-2735

Abstract: It has been widely accepted that there exist investors who adopt momentum strategies in real stock markets. Understanding the momentum behavior is of both academic and practical importance. For this purpose, we propose and study a simple agent-based model of trading incorporating momentum investors and random investors. The random investors trade randomly all the time. The momentum investors could be idle, buying or selling, and they decide on their action by implementing an action threshold that assesses the most recent price movement. The model is able to reproduce some of the stylized facts observed in real markets, including the fat-tails in returns, weak long-term correlation and scaling behavior in the kurtosis of returns. An analytic treatment of the model relates the model parameters to several quantities that can be extracted from real data sets. To illustrate how the model can be applied, we show that real market data can be used to constrain the model parameters, which in turn provide information on the behavior of momentum investors in different markets.

Keywords: Complex systems; Agent-based modeling; Econophysics (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (15)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:392:y:2013:i:12:p:2728-2735

DOI: 10.1016/j.physa.2013.02.011

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