Disposition Effect and its outcome on endogenous price fluctuations

Cafferata, Alessia and Tramontana, Fabio (2022): Disposition Effect and its outcome on endogenous price fluctuations.

Abstract

We develop a financial market model where a group of traders is af- fected by Disposition Effect, namely they are reluctant to realize losses. In particular, we present a set of stylized facts of financial markets (fat tails, volatility clustering, etc...) that can also be caused by the DE when the trading behaviour of agents are consistent with the findings of Ben-David and Hirshleifer (2012). In order to do that, we show that the version of the model where a class of agents is endowed with a high degree of Dispo- sition Effect, permits to obtain simulated time series whose features are closer to those of real financial market with respect to the version of the model where traders are not affected by it. This happens both for the deterministic version and the stochastic one.

• Item Type: MPRA Paper
• Language: English
• Keywords: Disposition Effect; Behavioural finance; Heterogeneous agents; Financial Markets.
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C62 - Existence and Stability Conditions of Equilibrium; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D84 - Expectations ; Speculations; G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates

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