Asymmetric return rates and wealth distribution influenced by the introduction of technical analysis into a behavioral agent based model

TL;DR

This paper presents an agent-based model incorporating behavioral finance and technical analysis to study stock market dynamics, revealing asymmetric return distributions and the conditions under which anti-imitation strategies are most profitable.

Contribution

It introduces a novel agent-based model combining psychological profiles, network connections, and technical analysis, highlighting the impact on wealth distribution and return asymmetry.

Findings

Anti-imitation can be the most profitable strategy under certain conditions.

Asymmetry in return rate distribution is robust across different decision algorithms.

Behavioral aspects significantly influence market fluctuations and wealth distribution.

Abstract

Behavioral Finance has become a challenge to the scientific community. Based on the assumption that behavioral aspects of investors may explain some features of the Stock Market, we propose an agent based model to study quantitatively this relationship. In order to approximate the simulated market to the complexity of real markets, we consider that the investors are connected among them through a small world network; each one has its own psychological profile (Imitation, Anti-Imitation, Random); two different strategies for decision making: one of them is based on the trust neighborhood of the investor and the other one considers a technical analysis, the momentum of the market index technique. We analyze the market index fluctuations, the wealth distribution of the investors according to their psychological profiles and the rate of return distribution. Moreover, we analyze the influence of changing the psychological profile of the hub of the network and report interesting results which show how and when anti-imitation becomes the most profitable strategy for investment. Besides this, an intriguing asymmetry of the return rate distribution is explained considering the behavioral aspect of the investors. This asymmetry is quite robust being observed even when a completely different algorithm to calculate the decision making of the investors was applied to it, a remarkable result which, up to our knowledge, has never been reported before.