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A financial market model with confirmation bias

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  • Cafferata, Alessia
  • Tramontana, Fabio

Abstract

We develop a financial market model with heterogeneous agents who can be affected by confirmation bias. In particular we consider optimistic and pessimistic agents who adjust their beliefs giving more attention and consideration to evidences supporting their prior beliefs. These kinds of traders coexist with fundamentalists and chartists. We show that this psychological bias makes beliefs more and more distant as time passes, and permits to better explain some important stylized facts of financial markets.

Suggested Citation

  • Cafferata, Alessia & Tramontana, Fabio, 2019. "A financial market model with confirmation bias," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 252-259.
    • Handle: RePEc:eee:streco:v:51:y:2019:i:c:p:252-259
    DOI: 10.1016/j.strueco.2019.08.004
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    References listed on IDEAS

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    Cited by:

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    2. Veniamin Mokhov & Sergei Aliukov & Anatoliy Alabugin & Konstantin Osintsev, 2023. "A Review of Mathematical Models of Macroeconomics, Microeconomics, and Government Regulation of the Economy," Mathematics, MDPI, vol. 11(14), pages 1-37, July.
    3. David G. Green, 2023. "Emergence in complex networks of simple agents," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 18(3), pages 419-462, July.
    4. Qingchong Chen & Xiong Xiong & Ya Gao, 2021. "Is information really efficient for the market? Evidence of confirmatory bias in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(5), pages 5965-5997, December.
    5. Bischi, Gian Italo & Matsumoto, Akio & Carrera, Edgar J. Sanchez, 2020. "Foreword to the SCED special issue on “Nonlinear Social Dynamics”," Structural Change and Economic Dynamics, Elsevier, vol. 52(C), pages 236-237.

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    More about this item

    Keywords

    Financial markets; Heterogeneous agents; Piecewise-defined maps; Monte Carlo simulations;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis

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