Contrarian Behavior, Information Networks and Heterogeneous Expectations in an Asset Pricing Market

49 Pages Posted: 8 Apr 2016

See all articles by Tomasz Makarewicz

Tomasz Makarewicz

Bielefeld University - Department of Business Administration and Economics

Date Written: February 22, 2016

Abstract

The paper studies the emergence of contrarian behavior in information networks in an asset pricing market. Financial traders coordinate on similar behavior, but have heterogeneous price expectations and are influenced by friends. According to a popular belief, they are prone to herding. However, in laboratory experiments subjects use contrarian strategies. Theoretical literature on learning in networks is scarce and cannot explain this conundrum (Gerasymchuk et al., 2013).

The paper follows Anufriev et al. (2014) and investigates an agent-based model, in which agents forecast price with a simple general heuristic: adaptive and trend extrapolation expectations, with an additional term of (dis-)trust towards their friends' mood. Agents independently use Genetic Algorithms to optimize the parameters of the heuristic. The paper considers friendship networks of symmetric (regular lattice, fully connected) and asymmetric architecture (random, rewired, star).

The main finding is that the agents learn contrarian strategies, which amplifies market turn-overs and hence price oscillations. Nevertheless, agents learn similar behavior and their forecasts remain well coordinated. The model therefore offers a natural interpretation for the difference between the experimental stylized facts and market surveys.

Keywords: Financial Bubbles, Learning in Networks, Learning to Forecast, Herding Behavior

JEL Classification: C63, D53, D83, D84, D85

Suggested Citation

Makarewicz, Tomasz, Contrarian Behavior, Information Networks and Heterogeneous Expectations in an Asset Pricing Market (February 22, 2016). Available at SSRN: https://ssrn.com/abstract=2760241 or http://dx.doi.org/10.2139/ssrn.2760241

Tomasz Makarewicz (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

P.O. Box 100131
Bielefeld, NRW 33501
Germany

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