Disposition effect and multi-asset market dynamics

Purpose: Asset pricing dynamics in a multi-asset framework when investors’ trading exhibits the disposition effect is studied. The purpose of this paper is to explore asset pricing dynamics and the switching behavior among multiple assets. Design/methodology/approach: The dynamics of complex financial markets can be best explored by following agent-based modeling approach. The artificial financial market is populated with traders following two heterogeneous trading strategies: the technical and the fundamental trading rules. By simulation, the switching behavior among multiple assets is investigated. Findings: The proposed framework can explain important stylized facts in financial time series, such as random walk price dynamics, bubbles and crashes, fat-tailed return distributions, absence of autocorrelation in raw returns, persistent long memory of volatility, excess volatility, volatility clustering and power-law tails. In addition, asset returns possess fractal structure and self-similarity features; though the switching behavior is only allowed among the asset markets. Practical implications: The model demonstrates stylized facts of most real financial markets. Thereafter, the proposed model can serve as a testbed for policy makers, scholars and investors. Originality/value: To the best of knowledge, no research has been conducted to introduce the disposition effect to a multi-asset agent-based model.