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A model of information flows and confirmatory bias in financial markets

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  • Mark Bowden

Abstract

An agent-based artificial market is developed to investigate the impact of confirmatory bias on volatility and kurtosis in one-period returns. Sentiment investors (similar to chartists) trade based on their assessment of future prices and the views of connected neighbours. Confirmatory bias reduces volatility and kurtosis, as new information becomes biased towards their previous decision thereby reducing trading activity. However, when the trading volume of the fundamental investor is low, confirmatory bias increases the levels of kurtosis in return suggesting that while overall trading activity of the sentiment investors falls, it becomes more coordinated. Copyright Springer-Verlag Italia 2015

Suggested Citation

  • Mark Bowden, 2015. "A model of information flows and confirmatory bias in financial markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 38(2), pages 197-215, October.
    • Handle: RePEc:spr:decfin:v:38:y:2015:i:2:p:197-215
    DOI: 10.1007/s10203-015-0164-y
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    Cited by:

    1. Adam Zaremba & Jacob Koby Shemer, 2018. "Price-Based Investment Strategies," Springer Books, Springer, number 978-3-319-91530-2, December.
    2. Alexander Harin, 2022. "Forbidden Zones for the Expectations of Data: New Mathematical Methods and Models for Behavioral Economics," Academic Journal of Applied Mathematical Sciences, Academic Research Publishing Group, vol. 8(1), pages 12-26, 12-2021.
    3. Harin, Alexander, 2021. "Behavioral economics. Forbidden zones. New method and models," MPRA Paper 106545, University Library of Munich, Germany.
    4. Cafferata, Alessia & Tramontana, Fabio, 2019. "A financial market model with confirmation bias," Structural Change and Economic Dynamics, Elsevier, vol. 51(C), pages 252-259.
    5. 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.

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    More about this item

    Keywords

    Confirmatory bias; Cognitive dissonance; Network economics; Information contagion; Behavioural finance; G12; G14; D83; D84;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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