Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/286406 
Authors: 
Year of Publication: 
2024
Series/Report no.: 
WWZ Working Paper No. 2024/01
Publisher: 
University of Basel, Center of Business and Economics (WWZ), Basel
Abstract (Translated): 
Recent survey evidence suggests that investors form beliefs about future stock returns by predominantly extrapolating their own experience: They overweight returns they have personally experienced while underweighting returns from earlier years and consequently expect high (low) stock market returns when they observe bullish (bearish) markets in their lifespan. Such events are difficult to reconcile with the existing models. This paper introduces a simple agent-based model for simulating artificial stock markets in which mean-variance optimizing investors have heterogeneous beliefs about future capital gains to form their expectations. Using this framework, I successfully reproduce various stylized facts from the empirical finance literature, such as underdiversification, the predictive power of the price-dividend ratio, and the autocorrelation of price changes. The experimental findings show that the most realistic market scenarios are produced when agents have a bias for recent returns. The study also established a link between underdiversification of investor portfolios and personal experiences.
Subjects: 
Expectations
Agent-based models (ABM)
Predictability
Heterogenousbeliefs
Artificial stock markets
JEL: 
C63
G12
D84
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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