Fundamentals unknown: momentum, mean-reversion and price-to-earnings trading in an artificial stock market

Joeri Schasfoort, Christopher Stockermans

    Research output: Working paperDiscussion paperAcademic

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    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.
    Original languageEnglish
    PublisherKiel Institute for the World Economy
    Publication statusPublished - 25-Sep-2017

    Publication series

    NameEconomics Discussion Papers
    No.2017-63

    Keywords

    • agent-based modelling
    • financial markets
    • technical and fundamental analysis
    • asset pricing

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