On the complicated price dynamics of a simple one-dimensional discontinuous financial market model with heterogeneous interacting traders

• Published in: Journal of economic behavior & organization Vol. 74; no. 3; pp. 187 - 205
• Main Authors: Tramontana, Fabio, Westerhoff, Frank, Gardini, Laura
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-06-2010; Elsevier; Elsevier Sequoia S.A
• Series: Journal of Economic Behavior & Organization
• Subjects: Asset pricing; Assets; Bifurcation analysis; Bifurcations; Capital market; Capital market theory; Discontinuous map; Economic models; Financial market; Financial markets; Financial markets Heterogeneous agents Technical and fundamental analysis Nonlinear dynamics Discontinuous map Bifurcation analysis; Financial models; Heterogeneous agents; Mathematical finance; Nonlinear dynamics; Numerical analysis; Price formation; Prices; Securities markets; Securities prices; Securities trading; Simplicity; Stock prices; Studies; Technical and fundamental analysis; Traders; Trading; D84; Nonlinear dynamics; Financial markets; Technical and fundamental analysis; Bifurcation analysis; Discontinuous map; G12; G15; G14; Heterogeneous agents
• ISSN: 0167-2681; 1879-1751
• DOI: 10.1016/j.jebo.2010.02.008

We develop a financial market model with heterogeneous interacting agents: market makers adjust prices with respect to excess demand, chartists believe in the persistence of bull and bear markets and fundamentalists bet on mean reversion. Moreover, speculators trade asymmetrically in over- and undervalued markets and while some of them determine the size of their orders via linear trading rules others always trade the same amount of assets. The dynamics of our model is driven by a one-dimensional discontinuous map. Despite the simplicity of our model, analytical, graphical and numerical analysis reveals a surprisingly rich set of interesting dynamical behaviors.