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Itchy feet vs cool heads: Flow of funds in an agent-based financial market

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  • Palczewski, Jan
  • Schenk-Hoppé, Klaus Reiner
  • Wang, Tongya

Abstract

Investors tend to move funds when they are unhappy with their current portfolio managers׳ performance. We study the effect of the size of this flow of funds in an agent-based model of the financial market. The model combines the discrete choice approach from agent-based modelling, where all capital is mobile, with the evolutionary finance framework where all growth is endogenous. Our results show that, if investors exhibit recency bias in evaluating portfolio managers׳ performance, even a small amount of freely flowing capital has a huge impact on the market dynamics and the survival of noise traders. We also find that investors׳ intensity of choice is a driving force for excess volatility and extreme price movements when the size of the flow of funds is large.

Suggested Citation

  • Palczewski, Jan & Schenk-Hoppé, Klaus Reiner & Wang, Tongya, 2016. "Itchy feet vs cool heads: Flow of funds in an agent-based financial market," Journal of Economic Dynamics and Control, Elsevier, vol. 63(C), pages 53-68.
    • Handle: RePEc:eee:dyncon:v:63:y:2016:i:c:p:53-68
    DOI: 10.1016/j.jedc.2015.12.002
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    3. Thorsten Hens & Klaus R. Schenk‐Hoppé, 2020. "Patience Is a Virtue: In Value Investing," International Review of Finance, International Review of Finance Ltd., vol. 20(4), pages 1019-1031, December.
    4. Roberto Dieci & Xue-Zhong He, 2018. "Heterogeneous Agent Models in Finance," Research Paper Series 389, Quantitative Finance Research Centre, University of Technology, Sydney.
    5. Hirshleifer, David & Lo, Andrew W. & Zhang, Ruixun, 2023. "Social contagion and the survival of diverse investment styles," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    6. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    7. Kotaro Miwa & Kazuhiro Ueda, 2017. "Is the Extension of Trading Hours Always Beneficial? An Artificial Agent-Based Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 50(4), pages 595-627, December.
    8. Roberto Dieci & Xue-Zhong He, 2021. "Cross-section instability in financial markets: impatience, extrapolation, and switching," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 727-754, December.
    9. Ali Taherizadeh & Shiva Zamani, 2023. "Winner Strategies in a Simulated Stock Market," IJFS, MDPI, vol. 11(2), pages 1-17, May.

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    More about this item

    Keywords

    Portfolio management; Agent-based financial market; Evolutionary finance; Flow of funds;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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