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An asset pricing model with loss aversion and its stylized facts

An asset pricing model with loss aversion and its stylized facts
An asset pricing model with loss aversion and its stylized facts
A well-defined agent-based model able to match the widely observed properties of financial assets is valuable for testing the implications of various empirically observed heuristics associated with investors behaviour. In this paper, we extend one of the most successful models in capturing the observed behaviour of traders, and present a new behavioural asset pricing model with heterogeneous agents. Specifically, we introduce a new behavioural bias in the model, loss aversion, and show that it causes a major difference in the agents interactions. As we demonstrate, the resulting dynamics achieve one of the major objectives of the field, replicating a rich set of the stylized facts of financial data. In particular, for the first time our model enables us to match the following empirically observed properties: conditional heavy tails of returns, gains/loss asymmetry, volume power-law and long memory and volume-volatility relations.
IEEE
Pruna, Radu
73b6feac-30f0-4c5b-80c9-38bbf3d47e80
Polukarov, Maria
bd2f0623-9e8a-465f-8b29-851387a64740
Jennings, Nicholas
ab3d94cc-247c-4545-9d1e-65873d6cdb30
Pruna, Radu
73b6feac-30f0-4c5b-80c9-38bbf3d47e80
Polukarov, Maria
bd2f0623-9e8a-465f-8b29-851387a64740
Jennings, Nicholas
ab3d94cc-247c-4545-9d1e-65873d6cdb30

Pruna, Radu, Polukarov, Maria and Jennings, Nicholas (2017) An asset pricing model with loss aversion and its stylized facts. In 2016 IEEE Symposium Series on Computational Intelligence (SSCI). IEEE. 8 pp . (doi:10.1109/SSCI.2016.7850003).

Record type: Conference or Workshop Item (Paper)

Abstract

A well-defined agent-based model able to match the widely observed properties of financial assets is valuable for testing the implications of various empirically observed heuristics associated with investors behaviour. In this paper, we extend one of the most successful models in capturing the observed behaviour of traders, and present a new behavioural asset pricing model with heterogeneous agents. Specifically, we introduce a new behavioural bias in the model, loss aversion, and show that it causes a major difference in the agents interactions. As we demonstrate, the resulting dynamics achieve one of the major objectives of the field, replicating a rich set of the stylized facts of financial data. In particular, for the first time our model enables us to match the following empirically observed properties: conditional heavy tails of returns, gains/loss asymmetry, volume power-law and long memory and volume-volatility relations.

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An Asset Pricing Model with Loss Aversion and its Stylized Facts.pdf - Accepted Manuscript
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More information

Accepted/In Press date: 14 October 2016
e-pub ahead of print date: 13 February 2017
Published date: 13 February 2017
Venue - Dates: IEEE SSCI 2016, Athens, Greece, 2016-12-06 - 2016-12-09
Organisations: Agents, Interactions & Complexity

Identifiers

Local EPrints ID: 401585
URI: http://eprints.soton.ac.uk/id/eprint/401585
PURE UUID: 6879142d-af8d-4753-8319-e51cf95af6c5

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Date deposited: 14 Oct 2016 14:33
Last modified: 06 Oct 2020 22:59

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Contributors

Author: Radu Pruna
Author: Maria Polukarov
Author: Nicholas Jennings

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