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Investigation of the rule for investment diversification at the time of a market crash using an artificial market simulation

Isao Yagi (), Atsushi Nozaki and Takanobu Mizuta
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Isao Yagi: Kanagawa Institute of Technology
Atsushi Nozaki: Graduate School of Kanagawa Institute of Technology
Takanobu Mizuta: SPARX Asset Management Co., Ltd.

Evolutionary and Institutional Economics Review, 2017, vol. 14, issue 2, 451-465

Abstract: Abstract As financial products have grown in complexity and level of risk compounding in recent years, investors have come to find it difficult to assess investment risk. Furthermore, companies managing mutual funds are increasingly expected to perform risk control and thus prevent assumption of unforeseen risk by investors. A related revision to the mutual fund legal system in Japan led to establishing what is known as “the rule for investment diversification” in December 2014, without a clear discussion of its expected effects on market price formation having taken place. In this paper, we therefore, used an artificial market to investigate its effects on price formation in financial markets where investors must follow the rule at the time of a market crash that was caused by the collapse of the asset fundamental price. As results, we found that, in a two-asset market where investors had to follow the rule for investment diversification, when the fundamental price of one asset collapsed and its market price also collapsed, the other asset market price also fell.

Keywords: Artificial market; Multi-agent based simulation; The rule for investment diversification; Leverage; Financial market (search for similar items in EconPapers)
JEL-codes: C63 G18 G01 (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:spr:eaiere:v:14:y:2017:i:2:d:10.1007_s40844-017-0070-9