ACCS Weekly Meeting - Visiting Speaker

Place: Room 621/622, GP South (Building 78)
Time: Thursday 1 March 2007, 10:30 Morning Tea, 11:00am Seminar

Speaker: Mark Bowden, ACCS PhD Candidate

Title: 'Information Contagion and Financial Prices'

Abstract:
People enjoy discussing finance markets. There is also evidence that these discussions effect the investment decisions of individuals. While interaction seems to be an important aspect of investment behaviour, at the very least among small investors, the efficient market hypothesis is predominantly concerned with information efficiency, i.e. the speed at which new information is incorporated into the stock price. In this paper a simple artificial market is developed whereby 'sentiment' investors trade with each other as well as with a 'fundamentals' trader. The sentiment investor differs from the technical trader usually used in such a model. They buy and sell based on their level of comfort in the market rather than hard and fast trading rules. In this way, they better mimic the trading of the typical 'mum and dad' investor. It is shown that such a model can offer some explanation into the kurtosis and persistence characteristics of volatility in returns generated in financial markets. It may also offer some insights into the momentum effect of generally rising or falling markets commonly referred to as bull and bear markets. However, it is also shown that herd behaviour among sentiment investors cannot explain the formation of bubbles in markets if they face liquidity constraints.