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Can Prospect Theory Explain Market Calendar Effects?

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  • Mayo, Robert

Abstract

The purpose of this project is to determine if calendar effects observed in stock markets can be explained by prospect theory. In order to answer this question, I have created an agent based model simulating a stock market. There was no sign of any calendar effect in any of the configurations tested to a very high degree of confidence. In addition, there was no obvious difference in the market results generated between optimizing traders following multiple complex strategies and simple zero intelligence traders constrained only by their respective liquidity.

Suggested Citation

  • Mayo, Robert, 2013. "Can Prospect Theory Explain Market Calendar Effects?," MPRA Paper 96719, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:96719
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    File URL: https://mpra.ub.uni-muenchen.de/96719/1/MPRA_paper_96719.pdf
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    References listed on IDEAS

    as
    1. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    2. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
    3. E. Samanidou & E. Zschischang & D. Stauffer & T. Lux, 2007. "Agent-based Models of Financial Markets," Papers physics/0701140, arXiv.org.
    4. B. LeBaron, 2001. "A builder's guide to agent-based financial markets," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 254-261.
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    More about this item

    Keywords

    Calendar effects; Agent-based model;

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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