Investigation of the rule for investment diversification at the time of a market crash using an artificial market simulation
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As financial products have grown in complexity and level of risk compounding in recent years, investors have come to find it difficult to assess investment risk. Furthermore, companies managing mutual funds are increasingly expected to perform risk control and thus prevent assumption of unforeseen risk by investors. A related revision to the mutual fund legal system in Japan led to establishing what is known as “the rule for investment diversification” in December 2014, without a clear discussion of its expected effects on market price formation having taken place. In this paper, we therefore, used an artificial market to investigate its effects on price formation in financial markets where investors must follow the rule at the time of a market crash that was caused by the collapse of the asset fundamental price. As results, we found that, in a two-asset market where investors had to follow the rule for investment diversification, when the fundamental price of one asset collapsed and its market price also collapsed, the other asset market price also fell.
KeywordsArtificial market Multi-agent based simulation The rule for investment diversification Leverage Financial market
JEL ClassificationC63 - Computational techniques Simulation modeling · G18 · Government Policy and Regulation · G01 · Financial crises
This research was supported by JSPS KAKENHI Grant Number 15K01211.
It should be noted that the opinions contained herein are solely those of the authors and do not necessarily reflect those of SPARX Asset Management Co., Ltd.
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