Numerical Simulation for Influence of Overconfidence and Regret Aversion on Return Distribution

According to behavioral finance's study, investors' behavioral biases will be reflected in the distribution of return rates. This article constructs a numerical simulation scheme to study the return rate distributions under the influences of overconfidence and regret aversion and shows that, compared with the normal distribution under the Efficient Market Hypothesis, the simulated distributions have higher peaks and fatter tails, and they are skewed to the left with the left tails thicker than the right ones. Moreover, the height of peaks and the thickness of tails will decrease as the time horizons for the returns become longer. Further numerical experiments illustrate that, forthe simulated distributions, when the time lag of reaction increases, the kurtosis of the simulated distribution has an obvious increase, and the left tail tends to decrease; when under-reaction aggravates, the kurtosis and the thickness exhibit a concurrent increase; when the degree of over-reaction becomes large, the right tail has an obvious increase; the right tail is insensitive, whereas the thickness of the left tail tends to decrease with the increase of the disposition effect.