Decisions in Economics and Finance

, Volume 38, Issue 2, pp 197–215

A model of information flows and confirmatory bias in financial markets

Article

Abstract

An agent-based artificial market is developed to investigate the impact of confirmatory bias on volatility and kurtosis in one-period returns. Sentiment investors (similar to chartists) trade based on their assessment of future prices and the views of connected neighbours. Confirmatory bias reduces volatility and kurtosis, as new information becomes biased towards their previous decision thereby reducing trading activity. However, when the trading volume of the fundamental investor is low, confirmatory bias increases the levels of kurtosis in return suggesting that while overall trading activity of the sentiment investors falls, it becomes more coordinated.

Keywords

Confirmatory bias Cognitive dissonance, Network economics Information contagion Behavioural finance 

JEL Classification

G12 G14 D83 D84 

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Copyright information

© Springer-Verlag Italia 2015

Authors and Affiliations

  1. 1.Faculty of Business and Law, Swinburne University of TechnologyMelbourneAustralia

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