Itchy Feet vs Cool Heads: Flow of Funds in an Agent-based Financial Market

Jan Palczewski, Klaus Schenk-Hoppe, Tongya Wang

Research output: Contribution to journalArticlepeer-review

101 Downloads (Pure)

Abstract

Investors tend to move funds when they are unhappy with their current
portfolio managers’ performance. We study the effect of the size
of this flow of funds in an agent-based model of the financial market.
The model combines the discrete choice approach from agent-based
modelling, where all capital is mobile, with the evolutionary finance
framework where all growth is endogenous. Our results show that, if
investors exhibit recency bias in evaluating portfolio managers’ performance,
even a small amount of freely flowing capital has a huge impact
on the market dynamics and the survival of noise traders. We also find
that investors’ intensity of choice is a driving force for excess volatility
and extreme price movements when the size of the flow of funds is
large.
Original languageEnglish
Pages (from-to)53–68
JournalJournal of Economic Dynamics and Control
Volume63
Issue number0
DOIs
Publication statusPublished - 23 Dec 2015

Fingerprint

Dive into the research topics of 'Itchy Feet vs Cool Heads: Flow of Funds in an Agent-based Financial Market'. Together they form a unique fingerprint.

Cite this