scholarly journals Herding and Contrarian Behavior in Financial Markets: An Internet Experiment

2005 ◽  
Vol 95 (5) ◽  
pp. 1403-1426 ◽  
Author(s):  
Mathias Drehmann ◽  
Jörg Oechssler ◽  
Andreas Roider
Keyword(s):  
Financial Markets ◽  
Market Price ◽  
Informational Cascades ◽  
Fields Of Study ◽  
International Consulting ◽  
Fundamental Value

We report results of an Internet experiment designed to test the theory of informational cascades in financial markets (Christopher Avery and Peter Zemsky, 1998). More than 6,400 subjects, including a subsample of 267 consultants from an international consulting firm, participated in the experiment. We find that the presence of a flexible market price prevents herding. The presence of contrarian behavior distorts prices, however, and even after 20 decisions, convergence to the fundamental value is rare. We also report some interesting differences with respect to subjects' fields of study. Reassuringly, the behavior of the consultants turns out to be not significantly different from that of the remaining subjects.

scholarly journals Can Momentum Be Explained by Fund Flows or Disposition Effect? The Impact of Behavioral Biases and Capital Flows in Brazilian Market Movements

2021 ◽  
Vol 12 (1) ◽  
pp. 1-8
Author(s):  
Francisco Pitthan ◽  
Keyword(s):  
Financial Markets ◽  
Market Price ◽  
Robustness Analysis ◽  
Disposition Effect ◽  
Fund Flows ◽  
Fund Flow ◽  
Long Time ◽  
Fundamental Value ◽  
The Impact ◽  
The Empirical Analysis

Momentum is one of the most robust anomalies in financial markets, there are two main recent explanations for this phenomenon, a behavioral-based explanation through disposition-effect (i.e., the willingness to sell “winners” too quickly and to hold “losers” for a long time) and a fund-flow based explanation. The disposition-effect explanation is centered in the convergence of the spread between the fundamental value and the observed market price (disposition-effect causes an underreaction to news that generates this spread), and the fund flows-based explanation is due to the persistence of the performance of mutual-funds (which usually keep buying winning positions and selling the losses). This paper compares those theories using Brazilian data (which is suitable for the strong presence of momentum). The empirical analysis was done using Fama-MacBeth regressions with results pointing the disposition-effect explanation as the most significant, with the robustness analysis contributing positively to the main findings.

scholarly journals Emergent volatility in asset markets with heterogeneous agents

2001 ◽  
Vol 6 (3) ◽  
pp. 171-180 ◽  
Author(s):  
Honggang Li ◽  
J. Barkley Rosser
Keyword(s):  
Heterogeneous Agents ◽  
Moving Average ◽  
Asset Price ◽  
Market Price ◽  
Switching Behavior ◽  
Asset Markets ◽  
Technical Trading Rules ◽  
Market Participants ◽  
Fundamental Value ◽  
Discrete Formulation

This paper examines the emergence of complex volatility in dynamic asset markets when there are heterogeneous agents. A discrete formulation is studied with two categories of market participants, fundamentalist traders who buy when the asset price is below the fundamental value and sell when it is above and noise traders who use moving average technical trading rules that can lead them to chase trends. Agents switch from one type of strategy to the other according to relative returns. A variety of outcomes are studied using numerical simulation, including variation of market price responsiveness to changes in excess demand, in switching behavior, and the introduction of noise. Bifurcation analysis of certain parameters is presented.

scholarly journals Classifying financial markets up to isomorphism

2020 ◽  
Vol 476 (2241) ◽  
pp. 20200264
Author(s):  
J. Armstrong
Keyword(s):  
Financial Markets ◽  
Mutual Fund ◽  
Continuous Time ◽  
Automorphism Groups ◽  
Market Price ◽  
Complete Markets ◽  
Market Price Of Risk ◽  
Isomorphism Classes ◽  
Price Of Risk ◽  
The Absolute

Two markets should be considered isomorphic if they are financially indistinguishable. We define a notion of isomorphism for financial markets in both discrete and continuous time. We then seek to identify the distinct isomorphism classes, that is to classify markets. We classify complete one-period markets. We define an invariant of continuous-time complete markets which we call the absolute market price of risk. This invariant plays a role analogous to the curvature in Riemannian geometry. We classify markets when the absolute market price of risk is deterministic. We show that, in general, markets with non-trivial automorphism groups admit mutual fund theorems. We prove a number of such theorems.

scholarly journals TRADER DYNAMICS IN A MODEL MARKET

2000 ◽  
Vol 03 (03) ◽  
pp. 443-450 ◽  
Author(s):  
NEIL F. JOHNSON ◽  
MICHAEL HART ◽  
PAK MING HUI ◽  
DAFANG ZHENG
Keyword(s):  
Financial Markets ◽  
Historical Data ◽  
Market Price ◽  
Heterogeneous Population ◽  
Market Participants ◽  
Time Horizons ◽  
Large Fluctuations ◽  
Individual Traders ◽  
Model Market ◽  
Insight Into

We explore various extensions of Challet and Zhang's Minority Game in an attempt to gain insight into the dynamics underlying financial markets. First we consider a heterogeneous population where individual traders employ differing "time horizons" when making predictions based on historical data. The resulting average winnings per trader is a highly non-linear function of the population's composition. Second, we introduce a threshold confidence level among traders below which they will not trade. This can give rise to large fluctuations in the "volume" of market participants and the resulting market "price".

scholarly journals Speculative asset price dynamics and wealth taxes

2021 ◽  
Author(s):  
Sarah Mignot ◽  
Fabio Tramontana ◽  
Frank Westerhoff
Keyword(s):  
Asset Pricing ◽  
Financial Markets ◽  
Local Stability ◽  
Asset Price ◽  
Stability Domain ◽  
Steady States ◽  
Price Dynamics ◽  
Pricing Model ◽  
Asset Pricing Model ◽  
Fundamental Value

AbstractBased on the seminal asset-pricing model by Brock and Hommes (J Econ Dyn Control 22:1235–1274, 1998), we analytically show that higher wealth taxes increase the risky asset’s fundamental value, enlarge its local stability domain, may prevent the birth of nonfundamental steady states and, if they exist, reduce the risky asset’s mispricing. We furthermore find that higher wealth taxes may hinder the emergence of endogenous asset price oscillations and, if they exist, dampen their amplitudes. Since oscillatory price dynamics may be associated with lower mispricing than locally stable nonfundamental steady states, policymakers may not always want to suppress them by imposing (too low) wealth taxes. Overall, however, our study suggests that wealth taxes tend to stabilize the dynamics of financial markets.

scholarly journals Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?

2012 ◽  
Vol 102 (6) ◽  
pp. 2859-2896 ◽  
Author(s):  
YiLi Chien ◽  
Harold Cole ◽  
Hanno Lustig
Keyword(s):  
Financial Markets ◽  
Market Price ◽  
Large Mass ◽  
Risk Premia ◽  
Risk Compensation ◽  
Market Price Of Risk ◽  
Aggregate Shocks ◽  
Portfolio Rebalancing ◽  
Price Of Risk ◽  
Set Up

Our paper examines whether the failure of unsophisticated investors to rebalance their portfolios can help to explain the countercyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which a large mass of investors do not rebalance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors do. We find that intermittent rebalancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times. (JEL D14, E32, G11, G12)

A Study on Risk Management in Financial Market

2019 ◽  
pp. 182-197
Author(s):  
Smruti Rekha Das ◽  
Kuhoo ◽  
Debahuti Mishra ◽  
Pradeep Kumar Mallick
Keyword(s):  
Risk Management ◽  
Financial Markets ◽  
Interest Rates ◽  
Financial Market ◽  
Stock Prices ◽  
Historical Data ◽  
Market Price ◽  
Business Goals ◽  
Current Price ◽  
Management Of Risk

The basic aim of risk management is to recognize, assess, and prioritize risk in order to assure that the uncertainty should not deviate from the intended purpose of the business goals. Risk can take place from various sources, which includes uncertainty in financial markets, recessions, inflation, interest rates, currency fluctuations, etc. Various methods used for this management of risk are faced with various decisions such as the market price, historical data, statistical methodologies, etc. For stock prices, the information derives from the historical data where the next price depends only upon the current price and some of the outside factors. Financial market is very risky to invest money, but the proper prediction with handling the risk will benefit a lot. Various types of risk in the financial market and the appropriate solutions to overcome the risk are analyzed in this study.

Empirical Evaluations on Momentum Effects of Taiwan Index Futures via Stop-Loss and Stop-Profit Mechanisms

2019 ◽  
Vol 18 (02) ◽  
pp. 629-648 ◽  
Author(s):  
Mu-En Wu ◽  
Wei-Ho Chung
Keyword(s):  
Financial Markets ◽  
Market Price ◽  
Efficient Market Hypothesis ◽  
Stock Index ◽  
Stock Index Futures ◽  
Momentum Effect ◽  
Momentum Strategy ◽  
Momentum Strategies ◽  
Index Futures ◽  
Stop Loss

The Efficient-Market Hypothesis (EMH) is one of the important theories in financial markets. Under this hypothesis, developing a robust profitable strategy is infeasible because the market price fluctuates immediately following any new information and is thus unpredictable. However, many empirical studies have shown that certain trading strategies in the financial markets are profitable, and the Momentum Strategy is one of the major strategies among them. With four momentum strategies, this paper uses the real-world data points (intra-day data of one-minute time frame) for back-testing the Taiwan Stock Exchange Capitalization Weighted Stock Index Futures (TAIEX Futures) during the period from January 04, 2010 to March 25, 2015. Numerical comparisons among the four strategies reveal that there exist market inefficiencies in Taiwan stock market. We verified the momentum effect of Taiwan Index Futures market through different stop-loss and stop-profit mechanisms. In conclusion, the management of stop-loss and stop-profit is crucial in the profit/loss of the trading strategy. The technique can be applied to many trading methodologies in improving the quality of strategies. Money management provides another path for strategy planning other than purely focusing on the technical mechanisms.

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