A prototype model of speculative dynamics with position-based trading
AbstractThe paper extracts a prototype asset pricing model from the literature where a market maker adjusts prices in response to order imbalances and the strategies of fundamentalists and chartists are position-based, that is, the two groups are specified in terms of their desired holdings. The deterministic formulation of the model leads to a neutral delay-differential equation of the price, whose mathematical analysis is non-standard and may be of independent interest. The stability conditions are nevertheless quite analogous to the order-based Beja-Goldman model. The effects of parameter variations are also studied in a stochastic setting, where special emphasis is put on the misalignment between price and the time-varying fundamental value, the market maker's risk aversion, and the differential profits of fundamentalists and chartists.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 33 (2009)
Issue (Month): 5 (May)
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Web page: http://www.elsevier.com/locate/jedc
Asset pricing Market maker risk aversion Misalignment Neutral delay-differential equation;
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