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Theoretical Model of Stock Trading Behavior with Biases
Liu Ke1; Kin Keung Lai1; Yen Jerome2
2010
Conference NameWorld Congress on Engineering, World Congress on Engineering
Source PublicationProceedings of the World Congress on Engineering, World Congress on Engineering
Pages384-389
Conference Date30 June - 2 July 2010
Conference PlaceImperial Coll London, London, UNITED KINGDOM
Abstract

Stock investors are not fully rational during their trading, and many behavioral biases affect their trading behavior, such as representative bias and disposition effect. However, most of the literature on behavioral finance cast efforts on explaining empirical phenomena observed in financial markets, but little on how individual investors' trading performance is affected by their behavioral biases. As against the common perception that behavioral biases are always detrimental to investment performance, we conjecture that these biases can sometimes yield better trading outcomes for investors. Focusing on representative bias and disposition effect, we construct a mathematical model in which the representative investor follows a Bayesian trading strategy based on an underlying Markov chain, switching between Trending regime and Mean-reversion regime. By this model, we are able to undertake scenario analysis to track investor behavior and performance along the time, under different patterns of market movements. Results validate our conjecture by showing that the effect of behavioral biases can sometimes be positive on investor performance.

KeywordRepresentative Bias Trading Behavior Bayesian Investor Disposition Effect
Indexed BySSCI
Language英语
WOS Research AreaComputer Science ; Engineering
WOS SubjectComputer Science, Artificial Intelligence ; Computer Science, Information Systems ; Computer Science, Theory & Methods ; Engineering, Electrical & Electronic
WOS IDWOS:000394059800068
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Cited Times [WOS]:0   [WOS Record]     [Related Records in WOS]
Document TypeConference paper
CollectionFaculty of Business Administration
DEPARTMENT OF ACCOUNTING AND INFORMATION MANAGEMENT
Affiliation1.City University of Hong Kong
2.Tung Wah College, Hong Kong
Recommended Citation
GB/T 7714
Liu Ke,Kin Keung Lai,Yen Jerome. Theoretical Model of Stock Trading Behavior with Biases[C],2010:384-389.
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