Disposition Effect in an Agent-based Financial Market Model

Disposition effect, which refers to investors’ being reluctant to realize losses, is very common in financial markets, especially in mainland China. This paper introduces the disposition effect into a multi-agent model, to research investor behavior and its impact on financial markets. As the result of computer simulation, disposition effect reveals asymmetric volatility which reflects the actual situation in mainland China market, i.e. the impact of bad news on volatility is greater than the impact of good news of the same magnitude. Sensitivity analysis shows that investors’ disposition behaviour slows the release rate of news, makes market more stable around the fundamental price. Meanwhile, proper level of disposition effect can avoid some loss in investment, and make chartist get relative higher return than usual. These conclusions could hopefully offer insights and effective support for investment decision-making and policy regulation.