Discussion Paper

No. 2017-63 | September 25, 2017
Fundamentals unknown: momentum, mean-reversion and price-to-earnings trading in an artificial stock market

Abstract

The use of fundamentalist traders in the stock market models is problematic since fundamental values in the real world are unknown. Yet, in the literature to date, fundamentalists are often required to replicate key stylized facts. The authors present an agent-based model of the stock market in which the fundamental value of the asset is unknown. They start with a zero intelligence stock market model with a limit-order-book. Then, the authors add technical traders which switch between a simple momentum and mean reversion strategy depending on its relative profitability. Technical traders use the price to earnings ratio as a proxy for fundamentals. If price to earnings are either too high or too low, they sell or buy, respectively.

JEL Classification:

C63, D53, D84, G12, G17

Assessment

  • Downloads: 80

Links

Cite As

Joeri Schasfoort and Christopher Stockermans (2017). Fundamentals unknown: momentum, mean-reversion and price-to-earnings trading in an artificial stock market. Economics Discussion Papers, No 2017-63, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-63


Comments and Questions


Anonymous - Referee Report 1
October 19, 2017 - 08:05

see attached file