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A model of information flows and confirmatory bias in financial markets

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  • Mark Bowden

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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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    References listed on IDEAS

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    Keywords

    Confirmatory bias; Cognitive dissonance; Network economics; Information contagion; Behavioural finance; G12; G14; D83; D84;

    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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