Impact of strategy switching on wealth accumulation
Various investment strategies coexist in financial markets. Fluctuations in the profitability of strategies rationalize investors’ strategy switching behaviors. Under bounded rationality and limited information, such behavior is usually driven by comparing the past performance of different strate...
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| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | English |
| Published: |
2020
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| Subjects: | |
| Online Access: | https://hdl.handle.net/10356/137028 |
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| Institution: | Nanyang Technological University |
| Language: | English |
| Summary: | Various investment strategies coexist in financial markets. Fluctuations in the
profitability of strategies rationalize investors’ strategy switching behaviors. Under
bounded rationality and limited information, such behavior is usually driven by
comparing the past performance of different strategies. But at what pace should
investors change their strategies? Does a frequent strategy switching lead to a higher
wealth in the end? To answer these questions, a discrete dynamic heterogeneous agent
model is proposed, in which agents follow heuristic rules and a market maker adjusts
the price of a risky asset. Agents are classified by their propensity of strategy switching.
It is found that agents with a higher propensity adopt the better strategy more often, but
end up with less final wealth. This counter-intuitive phenomenon is caused by the
inconsistency between short-run profit and long-run wealth accumulation. |
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