Disposition effect and multi-asset market dynamics

Heba M. Ezzat

Review of Behavioral Finance, 2019, vol. 11, issue 2, 144-164

Abstract: Purpose - Asset pricing dynamics in a multi-asset framework when investors’ trading exhibits the disposition effect is studied. The purpose of this paper is to explore asset pricing dynamics and the switching behavior among multiple assets. Design/methodology/approach - The dynamics of complex financial markets can be best explored by following agent-based modeling approach. The artificial financial market is populated with traders following two heterogeneous trading strategies: the technical and the fundamental trading rules. By simulation, the switching behavior among multiple assets is investigated. Findings - The proposed framework can explain important stylized facts in financial time series, such as random walk price dynamics, bubbles and crashes, fat-tailed return distributions, absence of autocorrelation in raw returns, persistent long memory of volatility, excess volatility, volatility clustering and power-law tails. In addition, asset returns possess fractal structure and self-similarity features; though the switching behavior is only allowed among the asset markets. Practical implications - The model demonstrates stylized facts of most real financial markets. Thereafter, the proposed model can serve as a testbed for policy makers, scholars and investors. Originality/value - To the best of knowledge, no research has been conducted to introduce the disposition effect to a multi-asset agent-based model.

Keywords: Agent-based model; Financial markets; Bounded rationality; Fractals and scaling; Power-law distributions (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-01-2018-0003

DOI: 10.1108/RBF-01-2018-0003

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