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The destabilizing effect of regret in an agent-based asset pricing model

The destabilizing effect of regret in an agent-based asset pricing model
The destabilizing effect of regret in an agent-based asset pricing model
This paper defines a simple heterogeneous agent-based asset pricing model with regret and analyses the implications of this behavioural bias on the model's dynamics. We study the coexistence of locally stable attractors of the corresponding nonlinear deterministic system, one of the most common and generic mechanisms for generating important properties observed in real financial markets. By incorporating regret in agents' expectations, we demonstrate that it can destabilise the price and change a low volatility market regime into a high volatility one. Consequently, we show that a change in the agents' psychology contributes to the emergence of interesting new properties and that regret has the potential to explain key aspects of financial markets.
0378-4371
Pruna, Radu-Theodor
73b6feac-30f0-4c5b-80c9-38bbf3d47e80
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Jennings, Nicholas R.
3f6b53c2-4b6d-4b9d-bb51-774898f6f136
Pruna, Radu-Theodor
73b6feac-30f0-4c5b-80c9-38bbf3d47e80
Okhrati, Ramin
e8e0b289-be8c-4e73-aea5-c9835190a54a
Gerding, Enrico
d9e92ee5-1a8c-4467-a689-8363e7743362
Jennings, Nicholas R.
3f6b53c2-4b6d-4b9d-bb51-774898f6f136

Pruna, Radu-Theodor, Okhrati, Ramin, Gerding, Enrico and Jennings, Nicholas R. (2019) The destabilizing effect of regret in an agent-based asset pricing model. Physica A: Statistical Mechanics and its Applications. (Submitted)

Record type: Article

Abstract

This paper defines a simple heterogeneous agent-based asset pricing model with regret and analyses the implications of this behavioural bias on the model's dynamics. We study the coexistence of locally stable attractors of the corresponding nonlinear deterministic system, one of the most common and generic mechanisms for generating important properties observed in real financial markets. By incorporating regret in agents' expectations, we demonstrate that it can destabilise the price and change a low volatility market regime into a high volatility one. Consequently, we show that a change in the agents' psychology contributes to the emergence of interesting new properties and that regret has the potential to explain key aspects of financial markets.

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More information

Submitted date: 28 January 2019

Identifiers

Local EPrints ID: 430241
URI: http://eprints.soton.ac.uk/id/eprint/430241
ISSN: 0378-4371
PURE UUID: 39162c5f-3feb-4a34-830f-847fd2b62df3
ORCID for Ramin Okhrati: ORCID iD orcid.org/0000-0003-0103-7051
ORCID for Enrico Gerding: ORCID iD orcid.org/0000-0001-7200-552X

Catalogue record

Date deposited: 23 Apr 2019 16:30
Last modified: 20 Nov 2019 01:36

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Contributors

Author: Radu-Theodor Pruna
Author: Ramin Okhrati ORCID iD
Author: Enrico Gerding ORCID iD
Author: Nicholas R. Jennings

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