Analyzing the validity of passive investment strategies employing fundamental indices through agent-based simulation

  • Authors:

  • Hiroshi Takahashi;Satoru Takahashi;Takao Terano

  • Affiliations:

  • Graduate School of Business Administration, Keio University, Yokohama-city, Japan;Chuo Mitsui Asset Trust and Banking Company, Limited, Japan;Tokyo Institute of Technology, Yokohama, Japan

  • Venue:
  • KES-AMSTA'11 Proceedings of the 5th KES international conference on Agent and multi-agent systems: technologies and applications
  • Year:
  • 2011

Quantified Score

Hi-index 0.00

Visualization

Abstract

This research analyzes the influence of indices which are employed in the asset management business on financial markets through agent-based simulation. In this analysis, we focus on a fundamental index, which has been proposed as a new benchmark for investments in place of price indices, which are currently employed in practical business affairs. As a result of intensive experiments in the market, we made the following interesting findings: (1) fundamental indexing works as effectively as a price indexing in the market when market prices reflect fundamental values; (2) fundamental indexing contributes to market efficiency. However, we also found drawbacks to fundamental indexing, such as the risk of destabilizing markets when too many investors employ passive investment strategies using the fundamental index. These results are significant from both practical and academic viewpoints. These analyses also demonstrate the effectiveness of agent-based techniques for financial research.