Confidence and the stock market: an agent-based approach
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Published version
Date
2014-01-08
Authors
Bertella, Mario A.
Pires, Felipe R.
Feng, Ling
Stanley, Harry Eugene
Version
Published version
OA Version
Citation
Mario A Bertella, Felipe R Pires, Ling Feng, Harry Eugene Stanley. 2014. "Confidence and the Stock Market: An Agent-Based Approach." PLOS ONE, Volume 9, Issue 1, 9 pp. https://doi.org/10.1371/journal.pone.0083488
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.
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Copyright: © 2014 Bertella et al. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.