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Modeling investor sentiment and overconfidence in an agent-based stock market

Modeling investor sentiment and overconfidence in an agent-based stock market
Modeling investor sentiment and overconfidence in an agent-based stock market
Agent-based stock markets as bottom-up models of financial markets allow us to study the link between individual investor behavior and aggregate market phenomena, and as such are a useful tool for investigating the implications of behavioral finance and investor psychology. In this paper we want to disentangle between the effects of investor sentiment and investor overconfidence. While investor optimism or pessimism influences the expectations of future returns, overconfidence is related to the precision of those expectations and is modeled as miscalibration. In an artificial stock market based on the LLS model, we find that more optimistic investors create more pronounced booms and crashes in the market, when compared to the unbiased efficient market believers of the original model. In the case of extreme optimism, the optimistic investors end up dominating the market, while in the case of extreme pessimism, the market reduces to the benchmark model of rational informed investors. The overconfidence of investors is found to exacerbate the effects of investor sentiment
1875-8703
89-101
Lovric, Milan
64a3c876-4d8f-442f-9062-6dc491c773d1
Kaymak, U.
baac9f6c-c524-4367-b671-e9854a0f1e6a
Spronk, J.
e9b58abe-e9f9-4f89-b4e4-cb4f622c0390
Lovric, Milan
64a3c876-4d8f-442f-9062-6dc491c773d1
Kaymak, U.
baac9f6c-c524-4367-b671-e9854a0f1e6a
Spronk, J.
e9b58abe-e9f9-4f89-b4e4-cb4f622c0390

Lovric, Milan, Kaymak, U. and Spronk, J. (2010) Modeling investor sentiment and overconfidence in an agent-based stock market. [in special issue: Intelligent Systems in Finance and Banking] Human Systems Management, 29 (2), 89-101. (doi:10.3233/HSM-2010-0718).

Record type: Article

Abstract

Agent-based stock markets as bottom-up models of financial markets allow us to study the link between individual investor behavior and aggregate market phenomena, and as such are a useful tool for investigating the implications of behavioral finance and investor psychology. In this paper we want to disentangle between the effects of investor sentiment and investor overconfidence. While investor optimism or pessimism influences the expectations of future returns, overconfidence is related to the precision of those expectations and is modeled as miscalibration. In an artificial stock market based on the LLS model, we find that more optimistic investors create more pronounced booms and crashes in the market, when compared to the unbiased efficient market believers of the original model. In the case of extreme optimism, the optimistic investors end up dominating the market, while in the case of extreme pessimism, the market reduces to the benchmark model of rational informed investors. The overconfidence of investors is found to exacerbate the effects of investor sentiment

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Published date: 2010
Organisations: Transportation Group

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Local EPrints ID: 402374
URI: http://eprints.soton.ac.uk/id/eprint/402374
ISSN: 1875-8703
PURE UUID: a7060b71-19a4-40e8-af8a-5e75a59505cd
ORCID for Milan Lovric: ORCID iD orcid.org/0000-0002-8441-7625

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Date deposited: 11 Nov 2016 11:28
Last modified: 15 Mar 2024 03:14

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Contributors

Author: Milan Lovric ORCID iD
Author: U. Kaymak
Author: J. Spronk

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