Return Distribution under Behavioral Biases: A Numerical Simulation Study

Investors’ overconfidence and regret aversion lead to behavioral biases, such as over-reaction、 under-reaction and disposition effect. By constructing a numerical simulation model, this paper shows that, return distributions under the behavioral biases have higher peaks and fatter tails, and they are skew to left with the left tails thicker than the right ones, compared with normal distribution under Effective Market Hypothesis. Performances of return distributions under different degrees of the behavioral biases are also investigated.