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Heterogeneous fundamentalists and market maker inventories

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  • Carraro, Alessandro
  • Ricchiuti, Giorgio

Abstract

In this paper, we develop a heterogeneous agents model of asset price and inventory with a market maker who considers the excess demand of two groups of agents that employ the same trading rule (i.e. fundamentalists) with different beliefs on the fundamental value. The dynamics of our model is driven by a bi-dimensional discrete non-linear map. We show that the market maker has a destabilizing role when she actively manages the inventory. Moreover, inventory share and the distance between agents’ beliefs strongly influence the results: market instability and periodic, or even, chaotic price fluctuations can be generated. Finally, we show through simulations that endogenous fluctuations of the fractions of agents may trigger instability for a larger set of parameters.

Suggested Citation

  • Carraro, Alessandro & Ricchiuti, Giorgio, 2015. "Heterogeneous fundamentalists and market maker inventories," Chaos, Solitons & Fractals, Elsevier, vol. 79(C), pages 73-82.
    • Handle: RePEc:eee:chsofr:v:79:y:2015:i:c:p:73-82
    DOI: 10.1016/j.chaos.2015.05.031
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    2. Leonardo Bargigli, 2021. "A model of market making with heterogeneous speculators," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(1), pages 1-28, January.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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