Loss aversion in an agent-based asset pricing model

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Title: Loss aversion in an agent-based asset pricing model
Authors: Pruna, RT
Polukarov, M
Jennings, NR
Item Type: Journal Article
Abstract: A well-defined agent-based asset pricing model able to match the widely observed properties of financial time series is valuable for testing the implications of various biases associated with investors' behaviour. Extending one of the most successful models in capturing traders behaviour, we present a new behavioural agent-based asset pricing model. Specifically, we introduce a well-known behavioural bias in the model, loss aversion, and evaluate its implications. First, measuring how close the simulated time series are to its empirical counterparts, we show that the model with loss aversion better matches and explains the properties of real-world financial data, compared with the base model without the behavioural bias. Secondly, we assess the impact of different levels of loss aversion not only on the agents' switching mechanisms, but also on the properties of the time series generated by the model. We demonstrate how for different levels of the loss aversion parameter, the biased agents tend to be driven out of the market at different points in time. Since even the simplest strategies have been shown to survive the competition in an agent-based setting, we can link our findings with the behavioural finance literature, which states that investors' systematic biases lead to unexpected market behaviour, instabilities and systematic errors. Finally, we provide an in-depth analysis of the simulated time series and show the resulting dynamics replicate a rich set of the stylized facts including: absence of autocorrelation, heavy tails, volatility clustering and conditional heavy tails of returns, long memory of absolute returns, as well as volume–volatility relations, gain–loss asymmetry, power-law behaviour and long memory of volume.
Issue Date: 1-Nov-2019
Date of Acceptance: 12-Jul-2019
URI: http://hdl.handle.net/10044/1/74972
DOI: 10.1080/14697688.2019.1655784
ISSN: 1469-7688
Publisher: Taylor & Francis (Routledge)
Journal / Book Title: Quantitative Finance
Copyright Statement: © 2019 Taylor & Francis. This is an Accepted Manuscript of an article published by Taylor & Francis in Quantitative Finance on 01 November 2019, available online: https://doi.org/10.1080/14697688.2019.1655784
Keywords: Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
Agent-based modelling
Asset pricing
Loss aversion
Behavioural bias
Stylized facts
FOREIGN-EXCHANGE
FINANCIAL-MARKETS
PRICES
ECONOMICS
BEHAVIOR
Social Sciences
Science & Technology
Physical Sciences
Business, Finance
Economics
Mathematics, Interdisciplinary Applications
Social Sciences, Mathematical Methods
Business & Economics
Mathematics
Mathematical Methods In Social Sciences
Agent-based modelling
Asset pricing
Loss aversion
Behavioural bias
Stylized facts
FOREIGN-EXCHANGE
FINANCIAL-MARKETS
PRICES
ECONOMICS
BEHAVIOR
Finance
01 Mathematical Sciences
15 Commerce, Management, Tourism and Services
14 Economics
Publication Status: Published online
Embargo Date: 2021-05-01
Online Publication Date: 2019-11-01
Appears in Collections:Computing
Faculty of Natural Sciences



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