Up: 1:2

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

Thomas Fischer

Algorithmic Finance (2011), 1:2, 123-139
DOI: 10.3233/AF-2011-010

Published: Abstract, PDF.
Archived: SSRN.

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 and the presence of risk aversion lead to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. They can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. 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.

Enhanced Content

Download the Matlab m-file of the non-linear model executable in Matlab:
  • The first section defines the variables (with the values presented in the paper as a default).
  • The second section is the model itself.
  • The third section plots the major graphs as presented in the paper.

The Financial Toolbox package is required (for the moving average function) to execute the file. Apart from that, it should run on any distribution of Matlab.

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AT&T Labs Research

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Boston University

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Stanford University

Michael Sipser

Massachusetts Institute of Technology

Richard Thaler

University of Chicago

Stephen Wolfram

Wolfram Research

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Peter Bossaerts

California Institute of Technology

Emanuel Derman

Columbia University

Ming-Yang Kao

Northwestern University

Pete Kyle

University of Maryland

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Lawrence Berkeley National Laboratory

Richard J. Lipton

Georgia Tech

Avi Silberschatz

Yale University

Robert Webb

University of Virginia

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Giovanni Barone-Adesi

University of Lugano

Bruce Lehmann

University of California, San Diego

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