AGENT-BASED MODELING TO INVESTIGATE THE DISPOSITION EFFECT IN FINANCIAL MARKETS

Shi-Woei Lin () and Hui-Lung Huang
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Shi-Woei Lin: Department of Business Administration. Yuan Ze University
Hui-Lung Huang: Department of Business Administration. Yuan Ze University

Portuguese Journal of Management Studies, 2007, vol. XII, issue 2, 145-163

Abstract: One of the behavioral patterns that deviate from what is predicted by traditional financial theories is the disposition effect. Although most empirical studies have reported a significant disposition effect, researchers have yet to conduct a conclusive test of this effect because a competing hypothesis or confounding effects might explain the documented significance. Thus, we use the tools of computational intelligence, instead of empirical approaches, to explore market behavior. In particular, we allow agents with different investment strategies to interact and to compete with each other in an artificial futures market. We found that the S-shaped value curve proposed by prospect theory may be one of the causes of the observed behavior of the disposition effect. However, rational expectation such as short-term mean reversion can even be more decisive..

Keywords: agent-based model; disposition effect; behavioral bias; prospect theory; futures market. (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:pjm:journl:v:xii:y:2007:i:2:p:145-163

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