A volatile mind? Experimental evidence on dealers' biases and market volatility
ISSN: 1940-5979
Article publication date: 8 March 2022
Issue publication date: 29 June 2023
Abstract
Purpose
The study tests the hypothesis that following the arrival of news in the forex market, the trader/dealers demonstrate two kinds of biases which makes markets volatile: “Recurrence bias,” the belief that news which formerly led to volatility, will again generate volatility (i.e. volatility is recurring), and “Volatility Perception Bias,” the belief that increased volatility following the arrival of a news would persist.
Design/methodology/approach
The author uses a preliminary survey and three simulated trading game experiments involving professional foreign exchange dealers to understand these heuristic-led biases and the biases' impact on market volatility.
Findings
The paper finds evidence supporting the presence of both “Recurrence Bias” and “Volatility Perception Bias” and a statistically significant, positive impact of participant biases' on market heterogeneity.
Originality/value
The paper makes two important contributions: first, the use of simulated trading game experiment involving professional dealers and second, the incorporation of dealers' biases and heuristics in understanding forex volatility.
Keywords
Acknowledgements
The author would like to thank the dealers from commercial banks in India, Bangladesh, Nepal, Bhutan and Sri Lanka, who participated in the simulated trading game as also the survey. The infrastructural support provided by National Institute of Bank Management, Pune for the conduct of the simulated market sessions, as a part of management development programs on technical analysis, is deeply acknowledged. Support and feedback of students while designing the trading game is deeply acknowledged. There is no financial support availed for the present research. “The views and opinions expressed in the paper belong to the author and do not, in any way, reflect the views of the institutes the author represents.” The author takes the responsibility of errors, is any.
Funding: There is no funding availed by author or close relative or partner from any “interested party” (individual, group, or organization that has a financial, ideological, or political stake related to the article).
Conflict of interest: None.
Citation
Roy Trivedi, S. (2023), "A volatile mind? Experimental evidence on dealers' biases and market volatility", Review of Behavioral Finance, Vol. 15 No. 4, pp. 550-569. https://doi.org/10.1108/RBF-10-2021-0223
Publisher
:Emerald Publishing Limited
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