IDEAS home Printed from https://ideas.repec.org/a/pjm/journl/vxiiy2007i2p145-163.html
   My bibliography  Save this article

Agent-Based Modeling To Investigate The Disposition Effect In Financial Markets

Author

Listed:
  • Shi-Woei Lin

    (Department of Business Administration. Yuan Ze University)

  • Hui-Lung Huang

    (Department of Business Administration. Yuan Ze University)

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..

Suggested Citation

  • Shi-Woei Lin & Hui-Lung Huang, 2007. "Agent-Based Modeling To Investigate The Disposition Effect In Financial Markets," Portuguese Journal of Management Studies, ISEG, Universidade de Lisboa, vol. 0(2), pages 145-163.
    • Handle: RePEc:pjm:journl:v:xii:y:2007:i:2:p:145-163
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    References listed on IDEAS

    as
    1. Lakonishok, Josef & Smidt, Seymour, 1986. "Volume for Winners and Losers: Taxation and Other Motives for Stock Trading," Journal of Finance, American Finance Association, vol. 41(4), pages 951-974, September.
    2. Frino, Alex & Johnstone, David & Zheng, Hui, 2004. "The propensity for local traders in futures markets to ride losses: Evidence of irrational or rational behavior?," Journal of Banking & Finance, Elsevier, vol. 28(2), pages 353-372, February.
    3. J. Doyne Farmer, 2000. "Physicists Attempt To Scale The Ivory Towers Of Finance," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 3(03), pages 311-333.
    4. David Genesove & Christopher Mayer, 2001. "Loss Aversion and Seller Behavior: Evidence from the Housing Market," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(4), pages 1233-1260.
    5. Lei Feng & Mark Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, Springer, vol. 9(3), pages 305-351, September.
    6. Shapira, Zur & Venezia, Itzhak, 2001. "Patterns of behavior of professionally managed and independent investors," Journal of Banking & Finance, Elsevier, vol. 25(8), pages 1573-1587, August.
    7. Tesfatsion, Leigh, 2001. "Agent-Based Computational Economics: A Guide to the Literature," Staff General Research Papers Archive 1974, Iowa State University, Department of Economics.
    8. repec:bla:jfinan:v:53:y:1998:i:5:p:1775-1798 is not listed on IDEAS
    9. Lei Feng & Mark S. Seasholes, 2005. "Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?," Review of Finance, European Finance Association, vol. 9(3), pages 305-351.
    10. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    11. Locke, Peter R. & Mann, Steven C., 2005. "Professional trader discipline and trade disposition," Journal of Financial Economics, Elsevier, vol. 76(2), pages 401-444, May.
    12. Peter R. Locke & Zhan Onayev, 2005. "Trade Duration: Information and Trade Disposition," The Financial Review, Eastern Finance Association, vol. 40(1), pages 113-129, February.
    13. Hiroshi Takahashi & Takao Terano, 2003. "Agent-Based Approach to Investors? Behavior and Asset Price Fluctuation in Financial Markets," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 6(3), pages 1-3.
    14. repec:bla:jfinan:v:43:y:1988:i:3:p:677-97 is not listed on IDEAS
    15. Shefrin, Hersh & Statman, Meir, 1985. "The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-790, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Dalla Costa, Aldo Fortunato & Mollica, Vito & Singh, Abhay, 2021. "Payment methods and the disposition effect: Evidence from Indonesian mutual fund trading," Journal of Behavioral and Experimental Finance, Elsevier, vol. 30(C).
    2. Cristiana Cerqueira Leal & Gilberto Loureiro & Manuel J. Rocha Armada, 2018. "Selling winners, buying losers: Mental decision rules of individual investors on their holdings," European Financial Management, European Financial Management Association, vol. 24(3), pages 362-386, June.
    3. Vassilis A. Efthymiou & George N. Leledakis, 2014. "The price impact of the disposition effect on the ex-dividend day of NYSE and AMEX common stocks," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 711-724, April.
    4. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    5. Hincapié-Salazar, Juliana & Agudelo, Diego A., 2020. "Is the disposition effect in bonds as strong as in stocks? Evidence from an emerging market," Global Finance Journal, Elsevier, vol. 46(C).
    6. Kliger, Doron & Kudryavtsev, Andrey, 2008. "Reference point formation by market investors," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1782-1794, September.
    7. Lin, Mei-Chen & Chou, Pin-Huang, 2011. "Prospect theory and the effectiveness of price limits," Pacific-Basin Finance Journal, Elsevier, vol. 19(3), pages 330-349, June.
    8. Niu, Xiaofei & Li, Jianbiao, 2019. "How Time Constraint Affects the Disposition Effect?," EconStor Preprints 194618, ZBW - Leibniz Information Centre for Economics.
    9. Marco Pleßner, 2017. "The disposition effect: a survey," Management Review Quarterly, Springer, vol. 67(1), pages 1-30, February.
    10. Eom, Yunsung, 2018. "The opposite disposition effect: Evidence from the Korean stock index futures market," Finance Research Letters, Elsevier, vol. 26(C), pages 261-265.
    11. An, Li & Argyle, Bronson, 2021. "Overselling winners and losers: How mutual fund managers' trading behavior affects asset prices," Journal of Financial Markets, Elsevier, vol. 55(C).
    12. Andreu, Laura & Ortiz, Cristina & Sarto, José Luis, 2020. "Disposition effect in fund managers. Fund and stock-specific factors and the upshot for investors," Journal of Economic Behavior & Organization, Elsevier, vol. 176(C), pages 253-268.
    13. Jakusch, Sven Thorsten, 2017. "On the applicability of maximum likelihood methods: From experimental to financial data," SAFE Working Paper Series 148, Leibniz Institute for Financial Research SAFE, revised 2017.
    14. Choi, Darwin, 2019. "Disposition sales and stock market liquidity," Journal of Financial Markets, Elsevier, vol. 45(C), pages 19-36.
    15. Hermann, Daniel & Mußhoff, Oliver & Rau, Holger A., 2019. "The disposition effect when deciding on behalf of others," Journal of Economic Psychology, Elsevier, vol. 74(C).
    16. Jaya M. Prosad & Sujata Kapoor & Jhumur Sengupta & Saurav Roychoudhary, 2017. "Overconfidence and Disposition Effect in Indian Equity Market: An Empirical Evidence," Global Business Review, International Management Institute, vol. 19(5), pages 1303-1321, October.
    17. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    18. Daniela Vesselinova Balkanska, 2018. "Disposition effect and analyst forecast dispersion," Review of Quantitative Finance and Accounting, Springer, vol. 50(3), pages 837-859, April.
    19. Menkhoff, Lukas & Nikiforow, Marina, 2009. "Professionals' endorsement of behavioral finance: Does it impact their perception of markets and themselves?," Journal of Economic Behavior & Organization, Elsevier, vol. 71(2), pages 318-329, August.
    20. Gutiérrez-Nieto, Begoña & Ortiz, Cristina & Vicente, Luis, 2023. "A bibliometric analysis of the disposition effect: Origins and future research avenues," Journal of Behavioral and Experimental Finance, Elsevier, vol. 37(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pjm:journl:v:xii:y:2007:i:2:p:145-163. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Luís Mota de Castro, Tiago Cardão-Pito, Mark Crathorne (email available below). General contact details of provider: https://edirc.repec.org/data/isutlpt.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.