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Uncertainty about fundamental, pessimistic and overconfident traders: a piecewise-linear maps approach

Author

Listed:
  • Giovanni Campisi

    (University of Modena and Reggio Emilia)

  • Silvia Muzzioli

    (University of Modena and Reggio Emilia)

  • Fabio Tramontana

    (Catholic University of Milan Italy)

Abstract

We analyze a financial market model with heterogeneous interacting agents where fundamentalists and chartists are considered. We assume that fundamentalists are homogeneous in their trading strategy but heterogeneous in their belief about the asset’s fundamental value. On the other hand, we consider that chartists, when they are optimistic become overconfident and they trade more than when they are pessimistic. Consequently, our model dynamics are driven by a one-dimensional piecewise-linear continuous map with three linear branches. We investigate the bifurcation structures in the map’s parameter space and describe the endogenous fear and greed market dynamics arising from our asset-pricing model.

Suggested Citation

  • Giovanni Campisi & Silvia Muzzioli & Fabio Tramontana, 2021. "Uncertainty about fundamental, pessimistic and overconfident traders: a piecewise-linear maps approach," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 707-726, December.
    • Handle: RePEc:spr:decfin:v:44:y:2021:i:2:d:10.1007_s10203-021-00346-7
    DOI: 10.1007/s10203-021-00346-7
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    More about this item

    Keywords

    Piecewise-linear maps; Border-collision bifurcations; Fear and greed dynamics; Financial markets;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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