Itchy Feet vs Cool Heads: Flow of Funds in an Agent-Based Financial Market

Abstract

Investors tend to move funds when they are unhappy with their current portfolio managers' performance. We study the effect of the size of this flow of funds in an agent-based model of the financial market. The model combines the discrete choice approach from agent-based modelling, where all capital is mobile, with the evolutionary finance framework where all growth is endogenous. Our results show that a small amount of freely flowing capital can have a huge impact on the market dynamics. In contrast to the standard model, moreover, clients' intensity of choice has a strong effect even when they exhibit only a very mild recency bias.

Keywords: Portfolio management, agent-based financial market, evolutionary finance, flow of funds

JEL Classification: D53, G18, C63