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How the heterogeneity in investment horizons affects market trends

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  • Daye Li
  • Rongrong Li
  • Qiankun Sun

Abstract

To investigate the relationship between the liquidity and the divergent degree of heterogeneous investors with different investment horizons, we propose an agent-based model based on the assumptions of the fractal market hypothesis. A laboratory market is used to investigate the impact of the divergent degree on the stability of the financial market. Simulation results indicate that the market becomes more stable as investors become increasingly divergent and are more likely to absorb the orders of the other side and maintain a narrow trade gap. Moreover, with highly heterogeneous investors, the market is more efficient, less liable to crash and less volatile. The simulation, based on the agent-based model, demonstrates that the interactions and herding behaviours of investors lead to a market crash when the divergent structure shrinks and only limited investment horizons are available. The result also suggests an alternate explanation of the anomaly of efficient market hypothesis, which shows why the momentum and contrarian strategies can earn excess returns in the short term and the long term, respectively. It also verifies the hypothesis that heterogeneous investors with different investment horizons provide market liquidity.

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  • Daye Li & Rongrong Li & Qiankun Sun, 2017. "How the heterogeneity in investment horizons affects market trends," Applied Economics, Taylor & Francis Journals, vol. 49(15), pages 1473-1482, March.
    • Handle: RePEc:taf:applec:v:49:y:2017:i:15:p:1473-1482
    DOI: 10.1080/00036846.2016.1218433
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    1. He, Kaijian & Tso, Geoffrey K.F. & Zou, Yingchao & Liu, Jia, 2018. "Crude oil risk forecasting: New evidence from multiscale analysis approach," Energy Economics, Elsevier, vol. 76(C), pages 574-583.
    2. Mishelle Doorasamy & Prince Kwasi Sarpong, 2018. "Fractal Market Hypothesis and Markov Regime Switching Model: A Possible Synthesis and Integration," International Journal of Economics and Financial Issues, Econjournals, vol. 8(1), pages 93-100.

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