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Higher-Order Simulations: Strategic Investment Under Model-Induced Price Patterns



The trading and investment decision processes in financial markets become ever more dependent on the use of valuation and risk models. In the case of risk management for instance, modelling practice has become quite homogeneous and the question arises as to the effect this has on the price formation process. Furthermore, sophisticated investors who have private information about the use and characteristics of these models might be able to make superior gains in such an environment. The aim of this article is to test this hypothesis in a stylised market, where a strategic investor trades on information about the valuation and risk management models used by other market participants. Simulation results show that under certain market conditions, such a 'higher-order' strategy generates higher profits than standard fundamental and momentum strategies that do not draw on information about model use.

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  • Gilbert Peffer & Barbara Llacay, 2007. "Higher-Order Simulations: Strategic Investment Under Model-Induced Price Patterns," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 10(2), pages 1-6.
  • Handle: RePEc:jas:jasssj:2006-23-2

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    References listed on IDEAS

    1. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    2. David Hirshleifer, 2001. "Investor Psychology and Asset Pricing," Journal of Finance, American Finance Association, vol. 56(4), pages 1533-1597, August.
    3. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, July.
    4. Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
    5. Hiroshi Takahashi & Takao Terano, 2003. "Agent-Based Approach to Investors? Behavior and Asset Price Fluctuation in Financial Markets," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 6(3), pages 1-3.
    6. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
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    Cited by:

    1. Scott Moss, 2007. "Alternative Approaches to the Empirical Validation of Agent-Based Models," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 11(1), pages 1-5.


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