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News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents

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  • Fischer, Thomas

Abstract

This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker's finite price adjustment speed leads to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. Chartist can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Furthermore, noise in financial markets can lead to long time decoupling from fundamental value. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed.
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Suggested Citation

  • Fischer, Thomas, 2012. "News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 58930, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:58930
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/58930/
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    File URL: http://algorithmicfinance.org/1-2/pp123-139/
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    Cited by:

    1. Razvan Stefanescu & Ramona Dumitriu, 2016. "Contrarian and Momentum Profits during Periods of High Trading Volume preceded by Stock Prices Shocks," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 378-384.
    2. Syed Aliya Zahera & Rohit Bansal, 2018. "Do investors exhibit behavioral biases in investment decision making? A systematic review," Qualitative Research in Financial Markets, Emerald Group Publishing Limited, vol. 10(2), pages 210-251, May.
    3. Longbing Cao, 2021. "AI in Finance: Challenges, Techniques and Opportunities," Papers 2107.09051, arXiv.org.
    4. Thomas Fischer, 2017. "Can Redistribution by Means of a Progressive Labor Income-Taxation Transfer System Increase Financial Stability?," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 20(2), pages 1-3.
    5. Hung, Kuo-Che & Ma, Tai, 2017. "The effects of expectations-based monetary policy on international stock markets: An application of heterogeneous agent model," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 70-87.

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    More about this item

    Keywords

    Heterogeneous Agent Model; stock market; under and overreaction to news; moving average rules; financial stability;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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