Agent-based approach to investors' behavior and asset price fluctuation in financial markets

Hiroshi Takahashi, Takao Terano

Research output: Contribution to journalArticle

55 Citations (Scopus)

Abstract

In this paper, we use Agent-Based Approach to analyze how asset prices are affected by investors and investment systems that are based on Behavioral Finance. We build a virtual financial market that contains two types of investors: fundamentalists and non-fundamentalists. As a result of intensive experiments in the market, we find that (1) the traded price agrees with the fundamental value and the fundamentalists survive according to the principle of natural selection in the case that the market contains the same number of fundamentalists and trend predictors (investors who make trend prediction), (2) the traded price largely deviates from the fundamental value and the non-fundamentalists frequently obtain excess returns and therefore the fundamentalists are eliminated according to the principle of natural selection in the case that the proportion of trend predictors is extremely high or in the case that the investment ratio of the risk asset is restricted, and (3) the traded price largely deviates from the fundamental value in the case that the non-fundamentalists estimate the losses excessively, as pointed in Prospect Theory. These results indicate that the non-fundamentalists affect the traded prices and obtain excess returns also in real markets.

Original languageEnglish
JournalJASSS
Volume6
Issue number3
Publication statusPublished - 2003 Jun
Externally publishedYes

Fingerprint

financial market
fluctuation
investor
assets
Finance
investment ratio
market
trend
electronic market
Values
Experiments
finance
Financial markets
experiment

Keywords

  • Agent-Based Approach
  • Behavioral Finance
  • Financial Engineering
  • Natural Selection
  • Self-organizing Systems And Emergent Organization
  • Society Dynamics

ASJC Scopus subject areas

  • Social Sciences(all)

Cite this

Agent-based approach to investors' behavior and asset price fluctuation in financial markets. / Takahashi, Hiroshi; Terano, Takao.

In: JASSS, Vol. 6, No. 3, 06.2003.

Research output: Contribution to journalArticle

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