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Market oscillations induced by the competition between value-based and trend-based investment strategies

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  • G. Caginalp
  • D. Balenovich

Abstract

We consider financial market using mathematical models which incorporate an excess demand function that depends not only upon the price but on the price derivative. The classical (value-based) motivation for purchasing the equity is augmented with a trend-based strategy of buying due to rising prices. An analysis (based on money flow and the finiteness of assets) of the supply, demand and price as a function of time leads to a system of ordinary differential equations which is mathematically complete. The numerical study of our equations exhibits overshooting, abrupt reversals and oscillations in prices. We examine our models within the context of real markets and economic laboratory experiments by comparing its predictions with a set of Porter and Smith experiments and with all US stock market “crashes” since 1929.

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  • G. Caginalp & D. Balenovich, 1994. "Market oscillations induced by the competition between value-based and trend-based investment strategies," Applied Mathematical Finance, Taylor & Francis Journals, vol. 1(2), pages 129-164.
    • Handle: RePEc:taf:apmtfi:v:1:y:1994:i:2:p:129-164
    DOI: 10.1080/13504869400000009
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    Cited by:

    1. Mark DeSantis & David Swigon, 2018. "Slow-fast analysis of a multi-group asset flow model with implications for the dynamics of wealth," PLOS ONE, Public Library of Science, vol. 13(11), pages 1-25, November.
    2. Karl Ludwig Keiber, 2008. "Price discovery in the presence of boundedly rational agents," Quantitative Finance, Taylor & Francis Journals, vol. 8(3), pages 235-249.
    3. Mizuta, Hideyuki & Steiglitz, Ken & Lirov, Erez, 2003. "Effects of price signal choices on market stability," Journal of Economic Behavior & Organization, Elsevier, vol. 52(2), pages 235-251, October.
    4. Caginalp, Gunduz & Porter, David & Smith, Vernon, 2000. "Momentum and overreaction in experimental asset markets," International Journal of Industrial Organization, Elsevier, vol. 18(1), pages 187-204, January.
    5. Din Prathumwan & Wannika Sawangtong & Panumart Sawangtong, 2017. "An Analysis on the Fractional Asset Flow Differential Equations," Mathematics, MDPI, vol. 5(2), pages 1-17, June.

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