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Heterogeneous speculators, endogenous fluctuations and interacting markets: A model of stock prices and exchange rates

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  • Dieci, Roberto
  • Westerhoff, Frank

Abstract

We develop a discrete-time model in which the stock markets of two countries are linked via and with the foreign exchange market. The foreign exchange market is characterized by nonlinear interactions between technical and fundamental traders. Such interactions may generate complex dynamics and recurrent switching between "bull" and "bear" market phases via a well-known pitchfork and period-doubling bifurcation path, when technical traders become more aggressive. The two stock markets are populated by fundamentalists, and prices tend to evolve towards stable steady states, driven by linear laws of motion. A connection between such markets is established by allowing investors to trade abroad, and the resulting three-dimensional dynamical system is analyzed. One goal of our paper is to explore potential spill-over effects between foreign exchange and stock markets. A second, related goal is to study how the bifurcation sequence which characterizes the market with heterogeneous speculators is modified in the presence of interactions with other markets.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 34 (2010)
Issue (Month): 4 (April)
Pages: 743-764

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Handle: RePEc:eee:dyncon:v:34:y:2010:i:4:p:743-764

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Financial market interactions Nonlinear dynamics and chaos Bifurcation analysis;

References

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Citations

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Cited by:
  1. Christian Pierdzioch & Georg Stadtmann, 2010. "Herdenverhalten von Wechselkursprognostikern?," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 230(4), pages 436-453, August.
  2. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
  3. Westerhoff, Frank, 2011. "Interactions between the real economy and the stock market," BERG Working Paper Series 84, Bamberg University, Bamberg Economic Research Group.
  4. Huang, Weihong & Chen, Zhenxi, 2014. "Modeling regional linkage of financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 99(C), pages 18-31.
  5. Zhu, Mei & Wang, Duo & Guo, Maozheng, 2011. "Stochastic equilibria of an asset pricing model with heterogeneous beliefs and random dividends," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 131-147, January.
  6. Bowden, Mark P., 2012. "Information contagion within small worlds and changes in kurtosis and volatility in financial prices," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 553-566.
  7. Weihong HUANG & Zhenxi CHEN, 2012. "Regional Financial Markets With Common Currency," Economic Growth centre Working Paper Series 1210, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.
  8. Christian D. Dick & Lukas Menkhoff, 2013. "Exchange Rate Expectations of Chartists and Fundamentalists," CESifo Working Paper Series 4181, CESifo Group Munich.
  9. Schmitt, Noemi & Westerhoff, Frank, 2013. "Speculative behavior and the dynamics of interacting stock markets," BERG Working Paper Series 90, Bamberg University, Bamberg Economic Research Group.
  10. Lee, Hsiu-Yun, 2011. "Nonlinear exchange rate dynamics under stochastic official intervention," Economic Modelling, Elsevier, vol. 28(4), pages 1510-1518, July.

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