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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 33 (2009)
Issue (Month): 5 (May)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jedc
Asset pricing Market maker risk aversion Misalignment Neutral delay-differential equation;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- J. Doyne Farmer & Shareen Joshi, 2000.
"The price dynamics of common trading strategies,"
- Rui Carvalho, 2001. "The Dynamics of the Linear Random Farmer Model," Papers cond-mat/0107150, arXiv.org.
- Frank Westerhoff, 2003. "Market-maker, inventory control and foreign exchange dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 3(5), pages 363-369.
- Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2006.
"Asset price and wealth dynamics in a financial market with heterogeneous agents,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 30(9-10), pages 1755-1786.
- Carl Chiarella & Roberto Dieci & Laura Gardini, 2004. "Asset Price and Wealth Dynamics in a Financial Market with Heterogeneous Agents," Research Paper Series 134, Quantitative Finance Research Centre, University of Technology, Sydney.
- Carl Chiarella & Roberto Dieci, 2004. "Asset price and wealth dynamics in a financial market with heterogeneous agents," Computing in Economics and Finance 2004 261, Society for Computational Economics.
- He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October.
- Reiner Franke & Toichiro Asada, 2008. "Incorporating positions into asset pricing models with order-based strategies," Journal of Economic Interaction and Coordination, Springer, vol. 3(2), pages 201-227, December.
- Bradfield, James, 1979. "A Formal Dynamic Model of Market Making," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 14(02), pages 275-291, June.
- Beja, Avraham & Goldman, M Barry, 1980. " On the Dynamic Behavior of Prices in Disequilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 235-48, May.
- Fabio Tramontana & Laura Gardini & Frank Westerhoff, 2011. "Heterogeneous Speculators and Asset Price Dynamics: Further Results from a One-Dimensional Discontinuous Piecewise-Linear Map," Computational Economics, Society for Computational Economics, vol. 38(3), pages 329-347, October.
- Dieci, Roberto & Westerhoff, Frank, 2010. "Heterogeneous speculators, endogenous fluctuations and interacting markets: A model of stock prices and exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 743-764, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If references are entirely missing, you can add them using this form.