Confidence and the Stock Market: An Agent-Based Approach

Author(s)

Bertella, Mario A. ^{[1, 2, 3]} ; Pires, Felipe R. ^[4] ; Feng, Ling ^{[1, 2, 5, 6]} ; Stanley, Harry Eugene ^{[1, 2]}

Affiliation

^[1] Boston Univ, Dept Phys, Boston, MA 02215 - USA

^[2] Boston Univ, Ctr Polymer Studies, Boston, MA 02215 - USA

^[3] Sao Paulo State Univ UNESP, Dept Econ, Sao Paulo - Brazil

^[4] Companhia Metropolitano Sao Paulo, Sao Paulo - Brazil

^[5] Natl Univ Singapore, Dept Phys, Singapore 117548 - Singapore

^[6] Natl Univ Singapore, Ctr Computat Sci & Engn, Singapore 117548 - Singapore

• Document type: Journal article
• Source: PLoS One; v. 9, n. 1 JAN 8 2014.
• Web of Science Citations: 24

Abstract

Using a behavioral finance approach we study the impact of behavioral bias. We construct an artificial market consisting of fundamentalists and chartists to model the decision-making process of various agents. The agents differ in their strategies for evaluating stock prices, and exhibit differing memory lengths and confidence levels. When we increase the heterogeneity of the strategies used by the agents, in particular the memory lengths, we observe excess volatility and kurtosis, in agreement with real market fluctuations-indicating that agents in real-world financial markets exhibit widely differing memory lengths. We incorporate the behavioral traits of adaptive confidence and observe a positive correlation between average confidence and return rate, indicating that market sentiment is an important driver in price fluctuations. The introduction of market confidence increases price volatility, reflecting the negative effect of irrationality in market behavior. (AU)

• FAPESP's process: 12/17670-6 - Behavioral finance and agent models
• Grantee: Mario Augusto Bertella
• Support Opportunities: Scholarships abroad - Research