IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

An agent-based approach to financial stylized facts

  • Shimokawa, Tetsuya
  • Suzuki, Kyoko
  • Misawa, Tadanobu
Registered author(s):

    An important challenge of the financial theory in recent years is to construct more sophisticated models which have consistencies with as many financial stylized facts that cannot be explained by traditional models. Recently, psychological studies on decision making under uncertainty which originate in Kahneman and Tversky's research attract a lot of interest as key factors which figure out the financial stylized facts. These psychological results have been applied to the theory of investor's decision making and financial equilibrium modeling. This paper, following these behavioral financial studies, would like to propose an agent-based equilibrium model with prospect theoretical features of investors. Our goal is to point out a possibility that loss-averse feature of investors explains vast number of financial stylized facts and plays a crucial role in price formations of financial markets. Price process which is endogenously generated through our model has consistencies with, not only the equity premium puzzle and the volatility puzzle, but great kurtosis, asymmetry of return distribution, auto-correlation of return volatility, cross-correlation between return volatility and trading volume. Moreover, by using agent-based simulations, the paper also provides a rigorous explanation from the viewpoint of a lack of market liquidity to the size effect, which means that small-sized stocks enjoy excess returns compared to large-sized stocks.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.sciencedirect.com/science/article/pii/S0378437106013653
    Download Restriction: Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 379 (2007)
    Issue (Month): 1 ()
    Pages: 207-225

    as
    in new window

    Handle: RePEc:eee:phsmap:v:379:y:2007:i:1:p:207-225
    Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Mark Grinblatt & Bing Han, 2001. "Prospect Theory, Mental Accounting, and Momentum," Yale School of Management Working Papers amz2533, Yale School of Management, revised 01 May 2007.
    2. Nicholas Barberis & Ming Huang & Tano Santos, 1999. "Prospect Theory and Asset Prices," NBER Working Papers 7220, National Bureau of Economic Research, Inc.
    3. LeBaron, Blake, 2000. "Agent-based computational finance: Suggested readings and early research," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 679-702, June.
    4. Jonathan Shalev, 2000. "Loss aversion equilibrium," International Journal of Game Theory, Springer, vol. 29(2), pages 269-287.
    5. Bollerslev, Tim & Jubinski, Dan, 1999. "Equity Trading Volume and Volatility: Latent Information Arrivals and Common Long-Run Dependencies," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 9-21, January.
    6. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    7. Benartzi, Shlomo & Thaler, Richard H, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, MIT Press, vol. 110(1), pages 73-92, February.
    8. Wang, Jiang, 1994. "A Model of Competitive Stock Trading Volume," Journal of Political Economy, University of Chicago Press, vol. 102(1), pages 127-68, February.
    9. Shu-Heng Chen & Thomas Lux & Michele Marchesi, 1999. "Testing for Non-Linear Structure in an Artificial Financial Market," Discussion Paper Serie B 447, University of Bonn, Germany.
    10. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    11. Ding, Zhuanxin & Granger, Clive W. J., 1996. "Modeling volatility persistence of speculative returns: A new approach," Journal of Econometrics, Elsevier, vol. 73(1), pages 185-215, July.
    12. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
    13. Sagi, Jacob S., 2006. "Anchored preference relations," Journal of Economic Theory, Elsevier, vol. 130(1), pages 283-295, September.
    14. Arthur, W.B. & LeBaron, B. & Palmer, R., 1997. "Time Series Properties of an Artificial Stock Market," Working papers 9725, Wisconsin Madison - Social Systems.
    15. Epstein, Larry G & Zin, Stanley E, 1991. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: An Empirical Analysis," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 263-86, April.
    16. Sanford J Grossman & Joseph E Stiglitz, 1997. "On the Impossibility of Informationally Efficient Markets," Levine's Working Paper Archive 1908, David K. Levine.
    17. Gallant, A Ronald & Rossi, Peter E & Tauchen, George, 1992. "Stock Prices and Volume," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 199-242.
    18. Vives, X., 1993. "Short-Term Investment and the Informational Efficiency of the Market," UFAE and IAE Working Papers 207.93, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    19. Lo, Andrew W & MacKinlay, A Craig, 1990. "When Are Contrarian Profits Due to Stock Market Overreaction?," Review of Financial Studies, Society for Financial Studies, vol. 3(2), pages 175-205.
    20. Sugden, Robert, 2003. "Reference-dependent subjective expected utility," Journal of Economic Theory, Elsevier, vol. 111(2), pages 172-191, August.
    21. Gul, Faruk, 1991. "A Theory of Disappointment Aversion," Econometrica, Econometric Society, vol. 59(3), pages 667-86, May.
    22. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
    23. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    24. de Fontnouvelle, Patrick, 2000. "Information Dynamics In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 139-169, June.
    25. Xavier Vives, 1992. "The Speed of Information Revelation in a Financial Market Mechanism," CEPR Financial Markets Paper 0016, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ..
    26. Masatlioglu, Yusufcan & Ok, Efe A., 2005. "Rational choice with status quo bias," Journal of Economic Theory, Elsevier, vol. 121(1), pages 1-29, March.
    27. Lamoureux, Christopher G & Lastrapes, William D, 1990. " Heteroskedasticity in Stock Return Data: Volume versus GARCH Effects," Journal of Finance, American Finance Association, vol. 45(1), pages 221-29, March.
    28. Ronald Mahieu & Rob Bauer, 1998. "A Bayesian analysis of stock return volatility and trading volume," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 671-687.
    29. Chen, Shu-Heng & Yeh, Chia-Hsuan, 2002. "On the emergent properties of artificial stock markets: the efficient market hypothesis and the rational expectations hypothesis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 217-239, October.
    30. Brock, William A & LeBaron, Blake D, 1996. "A Dynamic Structural Model for Stock Return Volatility and Trading Volume," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 94-110, February.
    31. Harry Markowitz, 1952. "The Utility of Wealth," Journal of Political Economy, University of Chicago Press, vol. 60, pages 151.
    32. Tim Bollerslev, 1986. "Generalized autoregressive conditional heteroskedasticity," EERI Research Paper Series EERI RP 1986/01, Economics and Econometrics Research Institute (EERI), Brussels.
    33. Jeff Fleming & Chris Kirby & Barbara Ostdiek, 2006. "Stochastic Volatility, Trading Volume, and the Daily Flow of Information," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1551-1590, May.
    34. Andersen, Torben G, 1996. " Return Volatility and Trading Volume: An Information Flow Interpretation of Stochastic Volatility," Journal of Finance, American Finance Association, vol. 51(1), pages 169-204, March.
    35. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
    36. Wang, Jiang, 1993. "A Model of Intertemporal Asset Prices under Asymmetric Information," Review of Economic Studies, Wiley Blackwell, vol. 60(2), pages 249-82, April.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:379:y:2007:i:1:p:207-225. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.