A volatile mind? Experimental evidence on dealers' biases and market volatility

Smita Roy Trivedi

Review of Behavioral Finance, 2022, vol. 15, issue 4, 550-569

Abstract: Purpose - The study tests the hypothesis that following the arrival of news in the forex market, the trader/dealers demonstrate two kinds of biases which makes markets volatile: “Recurrence bias,” the belief that news which formerly led to volatility, will again generate volatility (i.e. volatility is recurring), and “Volatility Perception Bias,” the belief that increased volatility following the arrival of a news would persist. Design/methodology/approach - The author uses a preliminary survey and three simulated trading game experiments involving professional foreign exchange dealers to understand these heuristic-led biases and the biases' impact on market volatility. Findings - The paper finds evidence supporting the presence of both “Recurrence Bias” and “Volatility Perception Bias” and a statistically significant, positive impact of participant biases' on market heterogeneity. Originality/value - The paper makes two important contributions: first, the use of simulated trading game experiment involving professional dealers and second, the incorporation of dealers' biases and heuristics in understanding forex volatility.

Keywords: Behavioral finance; Simulated trading game experiment; Heuristics; C53; E71; G41 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-10-2021-0223

DOI: 10.1108/RBF-10-2021-0223

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