Thomas Fischer
Associate professor
News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents
Author
Summary, in English
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.
Publishing year
2012
Language
English
Pages
123-139
Publication/Series
Algorithmic Finance
Volume
1
Issue
2
Document type
Journal article
Publisher
IOS Press
Topic
- Business Administration
Keywords
- heterogeneous agent model
- stock market
- under and overreaction to news
- moving average rules
- financial stability
Status
Published
ISBN/ISSN/Other
- ISSN: 2157-6203