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Analyzing the Influence of Indexing Strategies on Investors’ Behavior and Asset Pricing Through Agent-Based Modeling: Smart Beta and Financial Markets

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Agent and Multi-Agent Systems: Technology and Applications

Part of the book series: Smart Innovation, Systems and Technologies ((SIST,volume 58))

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Abstract

This study analyzes the influence of indexing strategy on investors’ behavior and financial markets through agent-based modeling. In this analysis, I focus on smart beta index, which is proposed as a new stock index and condsidered to have better characteristics than traditional market capitalization-weighted indices. As a result of intensive computational simulation studies, we have concluded that a smart beta strategy is effective even in cases where the initial number of smart beta investors is small. This study also finds a significant relationship between the number of smart beta investors and trading volume. These results are significant from both practical and academic viewpoints.

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Notes

  1. 1.

    I built a virtual financial market on a personal computer with i7 4790 3.6 GHz, RAM32 GB. The simulation background is financial theory [5, 10].

  2. 2.

    ‘Buy-and-hold’ is an investment method to hold shares for the medium to long term.

  3. 3.

    This analysis covers the major types of investor behavior [16].

  4. 4.

    When market prices coincide with fundamental value, a fundamental index has the same score with a capitalization-weighted index.

  5. 5.

    The value of objective function \(f(w^i_t)\) depends on the investment ratio\((w^i_t)\). The investor decision-making model here is based on the Black/Litterman model that is used in securities investment [4, 11, 12].

  6. 6.

    In the actual market, evaluation tends to be conducted according to baseline profit and loss.

  7. 7.

    Selection pressures on an investment strategy become higher as the value of coefficient a increases.

  8. 8.

    Investors who get excess return tend to survive in this market.

  9. 9.

    This result coincides with Takahshi [22] which attempts to analyze the market with simplified conditions.

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Acknowledgments

This research was supported by a grant-in-aid from Zengin Foundation for Studies on Economics and Finance.

Author information

Authors and Affiliations

  1. Graduate School of Business Administration, Keio University, 4-1-1 Hiyoshi, Kohoku-ku, Yokohama, 223-8572, Japan

    Hiroshi Takahashi

Authors
  1. Hiroshi Takahashi
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Corresponding author

Correspondence to Hiroshi Takahashi .

Editor information

Editors and Affiliations

  1. Faculty of Electrical Engr & Comput, University of Zagreb, Zagreb, Croatia

    Gordan Jezic

  2. School of Mathematical & Computer Scienc, Heriot-Watt University, Edinburgh, United Kingdom

    Yun-Heh Jessica Chen-Burger

  3. KES International, Shoreham-by-sea, United Kingdom

    Robert J. Howlett

  4. University of Canberra, Canberra, South Australia, Australia

    Lakhmi C. Jain

A    List of Main Parameters

A    List of Main Parameters

This section lists the major parameters of the financial market designed for this paper. Explanations and values for each parameter are described.

M: Number of investors (1000)

N: Number of shares (1000)

\(F_t^i\): Total asset value of investor i for term t (\(F_0^i=2000\): common)

\(W_t\): Ratio of stock in benchmark for term t (\(W_0=0.5\))

\(w_t^i\): Stock investment rate of investor i for term t (\(w_0^i=0.5\): common)

\(y_t\): Profits generated during term t (\(y_0=0.5\))

\(\sigma _y\): Standard deviation of profit fluctuation (\(0.2/\sqrt{200}\))

\(\delta \): Discount rate for stock (0.1 / 200)

\(\lambda \): Degree of investor risk aversion (1.25)

\(\sigma _n\): Standard deviation of dispersion from short-term expected rate of return on shares (0.01)

c: Adjustment coefficient (0.01)

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Takahashi, H. (2016). Analyzing the Influence of Indexing Strategies on Investors’ Behavior and Asset Pricing Through Agent-Based Modeling: Smart Beta and Financial Markets. In: Jezic, G., Chen-Burger, YH., Howlett, R., Jain, L. (eds) Agent and Multi-Agent Systems: Technology and Applications. Smart Innovation, Systems and Technologies, vol 58. Springer, Cham. https://doi.org/10.1007/978-3-319-39883-9_27

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  • DOI: https://doi.org/10.1007/978-3-319-39883-9_27

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  • Publisher Name: Springer, Cham

  • Print ISBN: 978-3-319-39882-2

  • Online ISBN: 978-3-319-39883-9

  • eBook Packages: EngineeringEngineering (R0)

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