Agent-Based Models of Gain-Loss Asymmetry in Stock Returns
Summary
The document discusses models that may reproduce gain-loss asymmetry: the tendency for stock prices to rise gradually over longer periods and fall sharply over shorter periods. One response connects the phenomenon to the leverage effect and points to research on agent-based models with asymmetric trading and herding. Another describes a model with fundamentalist and chartist investors whose risk attitudes differ for gains and losses.
The cited paper uses inverse statistics to study price-rise and price-fall durations and reports that its simulation is consistent with empirical patterns. It proposes asymmetric investor psychology as a possible source of the behavior, rather than establishing it as the cause. The document offers references and a conceptual mechanism, but no model equations, replication details, or direct comparison of competing explanations. It also notes that the cited paper may be difficult to access, limiting how readily a reader can verify or reproduce the result.
Key ideas
- Gain-loss asymmetry describes gradual rises and comparatively sudden falls in stock prices.
- The leverage effect is suggested as a related concept with an established research literature.
- An agent-based model with herding and asymmetric trading is offered as one possible approach.
- A cited model combines fundamentalists and chartists with different risk attitudes toward gains and losses.
- The described simulation is consistent with empirical patterns, but does not establish investor psychology as their cause.
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Full text
# Gain/loss-asymmetry in artificial financial markets? # Gain/loss-asymmetry in artificial financial markets? The gain/loss asymmetry is a well known stylized fact: It basically states that real financial time series take longer for going up than going down. My question Are you aware of any artificial markets (multi-agent simulations) that are capable of reproducing this stylized fact of real markets? ## Answer by snth (score 3, accepted) https://quant.stackexchange.com/a/19183 Is this basically a version of the Leverage Effect? If so then there is an extensive literature on that and you might find something if you google with those keywords. For example is something like the following what you are looking for? Agent-based model with asymmetric trading and herding for complex financial systems - http://arxiv.org/abs/1407.5258 - slides ## Answer by vonjd (score 2) https://quant.stackexchange.com/a/22031 The following paper builds a multi-agent model where agents have asymmetric risk attitudes consistent with behavioural finance. The gain/loss asymmetry can be reproduced by this model: Investors’ risk attitudes and stock price fluctuation asymmetry (2011) by Yu Zhang, Honggang Li Abstract > Price rise/fall asymmetry, which indicates enduring but modest rises and sudden short-term falls, is a ubiquitous phenomenon in stock markets throughout the world. Instead of the widely used time series method, we adopt inverse statistics from turbulence to analyze this asymmetry. To explore its underlying mechanism, we build a multi-agent model with two kinds of investors, which are specifically referred to as fundamentalists and chartists. Inspired by Kahneman and Tversky’s claim regarding peoples’ asymmetric psychological responses to the equivalent levels of gains and losses, we assume that investors take different risk attitudes to gains and losses and adopt different trading strategies. The simulation results of the model developed herein are consistent with empirical work, which may support our conjecture that investors’ asymmetric risk attitudes might be one origin of rise/fall asymmetry. Unfortunately the paper is behind a paywall and I haven't found a freely available version. When you find one I will add the link to it here.
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