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

Author

Listed:
  • Isao Yagi

    (Kanagawa Institute of Technology)

  • Atsushi Nozaki

    (Graduate School of Kanagawa Institute of Technology)

  • Takanobu Mizuta

    (SPARX Asset Management Co., Ltd.)

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.

Suggested Citation

  • Isao Yagi & Atsushi Nozaki & Takanobu Mizuta, 2017. "Investigation of the rule for investment diversification at the time of a market crash using an artificial market simulation," Evolutionary and Institutional Economics Review, Springer, vol. 14(2), pages 451-465, December.
    • Handle: RePEc:spr:eaiere:v:14:y:2017:i:2:d:10.1007_s40844-017-0070-9
    DOI: 10.1007/s40844-017-0070-9
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    References listed on IDEAS

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    Cited by:

    1. Takanobu Mizuta & Sadayuki Horie, 2019. "Mechanism by which active funds make market efficient investigated with agent-based model," Evolutionary and Institutional Economics Review, Springer, vol. 16(1), pages 43-63, June.
    2. Yuji Aruka, 2017. "Special feature: preliminaries towards ontological reconstruction of economics—theories and simulations," Evolutionary and Institutional Economics Review, Springer, vol. 14(2), pages 409-414, December.
    3. Isao Yagi & Yuji Masuda & Takanobu Mizuta, 2020. "Analysis of the Impact of High-Frequency Trading on Artificial Market Liquidity," Papers 2010.13038, arXiv.org.

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    More about this item

    Keywords

    Artificial market; Multi-agent based simulation; The rule for investment diversification; Leverage; Financial market;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G01 - Financial Economics - - General - - - Financial Crises

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