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News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents

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  • Fischer, Thomas

Abstract

This paper presents a Heterogeneous Agent Model of a financial market with chartist and fundamentalist traders that exhibit bounded rationality and short-term thinking to explain the effect of under and overreaction to news. The existence of the Market Maker's finite price adjustment speed leads to the fact that prices do not adjust instantaneously to new information. Chartists use moving average rules to make their investment decisions. Chartist can transform an underreaction-only scenario into a market with overreaction. The use of long moving average rules might even make the market unstable. Furthermore, noise in financial markets can lead to long time decoupling from fundamental value. Higher market efficiency (low deviations from fundamental value), on the other hand, is achieved if high rationality and long-term thinking for the agents is assumed.

Suggested Citation

  • Fischer, Thomas, 2011. "News Reaction in Financial Markets within a Behavioral Finance Model with Heterogeneous Agents," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 77416, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    • Handle: RePEc:dar:wpaper:77416
    Note: for complete metadata visit http://tubiblio.ulb.tu-darmstadt.de/77416/
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    Cited by:

    1. Narayan Chandra Nayak & Jitendra Mahakud & Mantu Kumar Mahalik & Mamata Jenamani & Akankshya Samal & Sweta Sen & Alok Ranjan Mohanty, 2024. "What determines financial inclusion? A household-level investigation in rural Odisha, India," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 26(3), pages 888-906, December.
    2. Longbing Cao, 2021. "AI in Finance: Challenges, Techniques and Opportunities," Papers 2107.09051, arXiv.org.
    3. Razvan Stefanescu & Ramona Dumitriu, 2016. "Contrarian and Momentum Profits during Periods of High Trading Volume preceded by Stock Prices Shocks," Risk in Contemporary Economy, "Dunarea de Jos" University of Galati, Faculty of Economics and Business Administration, pages 378-384.

    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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