Abstract
According to behavioral finance theories, in this article we develop a dynamic model with heterogeneous traders, where the asset price is determined by the interaction among four different groups of agents: trend reversers, trend followers, risk averters and risk seekers. The main purpose of the study is centered on modeling and testing how the market efficiency changes along with the changes of agent’s behavior preference without exogenous influence. Combining with the assumption of risk appetite and prospect theory, focusing on analyzing the rules for selecting strategies, we establish a more reliable and comprehensive dynamic mechanism. In particular, our study suggests that diversified trading strategies will help to realize market efficiency.
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Cao, SN., Deng, J. & Li, H. Prospect theory and risk appetite: an application to traders’ strategies in the financial market. J Econ Interact Coord 5, 249–259 (2010). https://doi.org/10.1007/s11403-010-0073-7
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DOI: https://doi.org/10.1007/s11403-010-0073-7