Journal on Policy and Complex Systems
Clearly , market momentum is an important factor that affects agents ’ decision-making rules . Otherwise , there would be no bubbles and the price moves will be closer to our expectations . Heterogeneous agent models show that most of the behavioral models with bounded rational agents using differing strategies may not be perfect , but they perform reasonably well ( Hommes , 2006 ). With the adaptive trading strategies , agents are able to seek more trading opportunities and boost their profits .
Inclusion of market momentum in the stock-trading model potentially increases the return of investors since it allows agents to adjust their trading rules temporarily according to the latest market changes ( in anticipation of other traders ’ behavior ). In the stock-trading model , momentum was generated and updated by the overall buy / sell intentions of agents , thus creating a bid-ask spread for the stock they are trading . Bid-ask spreads are determined by the difference between the prices quoted for an immediate sale and for an immediate purchase . As a result , the bidding price increases if there are more buyers than sellers . Likewise , the stock price will decrease if there is a greater quantity of sellers .
4.4 Degree of Trust
The degree of trust in our model is denoted with the variable called self-confidence , which is created to control the degree of trust in the market momentum . The self-confidence only adjusts agents ’ trading rule temporary . If agents have a strong belief in the validity of their trading rules , then their self-confidences is high . As a result , their trading rules will be less impacted by the trading environment around them , due to the fact that they prefer to continue with their own trading strategies .
All agents have access to both the latest and historical market information , which is the basis for all the agents ’ trading decisions . Market momentum can also simulate the bandwagon effect in economics . The bandwagon effect means that an individual does something primarily because other individuals are doing it , regardless of his or her own beliefs . This effect is especially present in the bull market with the bubble-style growth of assets . As a result , agents ’ buy thresholds will increase rapidly if there are a lot of other agents who intend to buy , and sell thresholds will decrease quickly if many agents intend to sell . Because the self-confidence ranges from 0 to 1 , agents with the self-confidence of 1 will only follow their own trading rules , while the ones with the self-confidence of 0 will completely override their own believes with the market trend . But these extreme scenarios are rare in the simulation . Just like Guiso noticed ( Guiso , 2008 ), in this simulation , the degree of trust affects the stock-trading participation rate , which impacts the market momentum in return .
Self-confidence captures agents ’ degree of trust toward other agents ’
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