News and Prices Divorce: Investment Strategies from Behavioral Finance

Abstract

In this research letter we outline the interesting results of the new frontier of interdisciplinary field of behavioural finance and complex interacting systems. Indeed, empirical analysis of financial markets has shown number of stylized facts such as heavy tails or volatility "bursts" which are difficult to explain in terms of evolution of fundamental economic variables. The non-Gaussian, non-stable character of empirical distributions, such as excess demand or stock returns, demonstrate the weakness of any "independent agent" approach to model the real market. Extending the work of Bornholdt and extending the Brock and Durlauf work, we sketch the interest of analyzing stylized toy models of interacting agents whose payoff exhibit both a strategic complementarity with their nearest neighbors actions and an eventual global substitutability with the global market state. This approach may allows a deeper understanding of market dynamics in the quest of potential market inefficiencies to be exploited in Hedge Funds investment strategies.

Keywords: Hedge funds, investment strategies, simulation, metropolis, dynamic ising, interacting agents

JEL Classification: D00, D7