Feldman, T and Lepori, G (2016) Asset price formation and behavioral biases. Review of Behavioral Finance, 8 (2). 137 -155. ISSN 1940-5979

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Abstract

Purpose
The purpose of this paper is to examine the debate on whether psychology affects asset prices using agent-based modeling.

Design/methodology/approach
The authors set up three simulation regimes where the first regime contains fundamental investors who invest based on the mean-variance framework. The second regime includes purely irrational investors who invest based on behavioral biases. The third regime combines the two types of investors. The authors test whether the return properties from regime 3 converge to that of regime 1 or 2.

Findings
Results suggest that the type of irrationality affects return properties in different ways. Irrational investors who are introspective in their irrationality, only examining their performance and deficiencies, do not have much of a systematic effect on stock returns when combined with rational investors. However, irrational investors that aggregate information in an irrational manner have a systematic effect when combined with rational investors.

Research limitations/implications
Research implication of using simulation analysis is that the results need to be verified via other methods such as empirical and/or experimental analysis.

Practical implications
Practical implications of the research is that policy makers can look for factors that investors use to aggregate to better understand the movement of financial prices and ignore other factors.

Social implications
Social implication is that mass psychology impacts financial prices.

Originality/value
No other paper has used agent-based/behavioral analysis to better understand how different types of behavior may impact financial prices in different ways.

Item Type: Article
Uncontrolled Keywords: behavioural finance, financial markets
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Humanities and Social Sciences > Keele Management School
Depositing User: Symplectic
Date Deposited: 21 Jun 2017 15:28
Last Modified: 22 Jun 2018 08:21
URI: http://eprints.keele.ac.uk/id/eprint/3670

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