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Contagion effects in a chartist–fundamentalist model with time delays

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  • Dibeh, Ghassan
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    Abstract

    In this paper two models of speculative markets are developed to study the effects of feedback mechanisms in financial markets. In the first model, a crash market model couples a linear chartist–fundamentalist model with time delays with a log-periodic market index I(t) through direct coupling. Numerical solutions to the model show that asset prices exhibit significant persistence as a result of the coupling to the log-periodic market index. An extension to include endogenous wealth dynamics shows that the chartists benefit from the persistent dynamics induced by the coupling. The second model is a two-asset model represented by a 2-dimensional delay-differential equation. Asset one price exhibits limit cycle dynamics while in the second market asset prices follow stable damped oscillations. The markets are coupled through a diffusive coupling term. Solutions to the coupled model show that the dynamics of asset two changes fundamentally with the price now exhibiting a limit cycle. The stable converging dynamics is replaced with limit cycle oscillations around the fundamental.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378437107001355
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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 382 (2007)
    Issue (Month): 1 ()
    Pages: 52-57

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    Handle: RePEc:eee:phsmap:v:382:y:2007:i:1:p:52-57

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

    Related research

    Keywords: Delay-differential equations; Financial crises; Speculative markets;

    References

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    1. Westerhoff, Frank, 2003. "Speculative markets and the effectiveness of price limits," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 493-508, December.
    2. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
    3. Maskawa, Jun-ichi, 2003. "Multivariate Markov chain modeling for stock markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 324(1), pages 317-322.
    4. Dellas, Harris & Hess, Martin, 2005. "Financial development and stock returns: A cross-country analysis," Journal of International Money and Finance, Elsevier, vol. 24(6), pages 891-912, October.
    5. Martens, Martin & Poon, Ser-Huang, 2001. "Returns synchronization and daily correlation dynamics between international stock markets," Journal of Banking & Finance, Elsevier, vol. 25(10), pages 1805-1827, October.
    6. Dibeh, Ghassan, 2005. "Speculative dynamics in a time-delay model of asset prices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 199-208.
    7. Serwa, Dobromil & Bohl, Martin T., 2005. "Financial contagion vulnerability and resistance: A comparison of European stock markets," Economic Systems, Elsevier, vol. 29(3), pages 344-362, September.
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    Cited by:
    1. Ghassan Dibeh & Haidar Harmanani, 2012. "A Stochastic Chartist–Fundamentalist Model with Time Delays," Computational Economics, Society for Computational Economics, vol. 40(2), pages 105-113, August.

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