Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/84883
Authors: 
Fischer, Thomas
Year of Publication: 
2011
Series/Report no.: 
Darmstadt Discussion Papers in Economics 205
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 leads to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. Chartist can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Furthermore, noise in financial markets can lead to long time decoupling from fundamental value. 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.
Subjects: 
Heterogeneous
Agent
Model
stock market
under and overreaction to news
moving average rules
financial stability
JEL: 
G14
D84
C62
C15
Document Type: 
Working Paper

Files in This Item:
File
Size
383.14 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.