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Asset Price Dynamics in a Financial Market with Heterogeneous Trading Strategies and Time Delays

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Giuseppe Garofalo
Alessandro Sansone

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Abstract

In this paper we present a continuous time dynamical model of heterogeneous agents interacting in a financial market where transactions are cleared by a market maker. The market is composed of fundamentalist, trend following and contrarian agents who process information from the market with different time delays. Each class of investor is characterized by path dependent risk aversion. We also allow for the possibility of evolutionary switching between trend following and contrarian strategies. We find that the system shows periodic, quasi-periodic and chaotic dynamics as well as synchronization between technical traders. Furthermore, the model is able to generate time series of returns that exhibit statistical properties similar to those of the S&P500 index, which is characterized by excess kurtosis, volatility clustering and long memory

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File URL: http://arxiv.org/abs/physics/0607276
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Paper provided by arXiv.org in its series Quantitative Finance Papers with number physics/0607276.

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Date of creation: Jul 2006
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Handle: RePEc:arx:papers:physics/0607276

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  1. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August. [Downloadable!] (restricted)
  2. Benoit Mandelbrot & Adlai Fisher & Laurent Calvet, 1997. "A Multifractal Model of Asset Returns," Cowles Foundation Discussion Papers 1164, Cowles Foundation, Yale University. [Downloadable!]
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  3. Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June. [Downloadable!] (restricted)
  4. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December. [Downloadable!] (restricted)
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  5. 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. [Downloadable!] (restricted)
  6. repec:att:wimass:192023 is not listed on IDEAS
  7. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, School of Finance and Economics, University of Technology, Sydney. [Downloadable!]
  8. Xue-Zhong (Tony) He & Carl Chiarella, 2001. "Asset Price and Wealth Dynamics under Heterogeneous Expectations," CeNDEF Workshop Papers, January 2001 5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  9. Sethi, Rajiv, 1996. "Endogenous regime switching in speculative markets," Structural Change and Economic Dynamics, Elsevier, vol. 7(1), pages 99-118, March. [Downloadable!] (restricted)
  10. Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics. [Downloadable!]
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  11. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February. [Downloadable!] (restricted)
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  12. Carl Chiarella & Roberto Dieci & Laura Gardini, 2005. "The Dynamic Interaction of Speculation and Diversification," Applied Mathematical Finance, Taylor and Francis Journals, vol. 12(1), pages 17-52, March. [Downloadable!] (restricted)
  13. Gaunersdorfer, A. & Hommes, C.H., 2000. "A Nonlinear Structural Model for Volatility Clustering," CeNDEF Working Papers 00-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  14. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March. [Downloadable!] (restricted)
  15. Carl Chiarella & Xue-Zhong He, 2000. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model with a Market Maker," Research Paper Series 35, Quantitative Finance Research Centre, University of Technology, Sydney. [Downloadable!]
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  16. 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. [Downloadable!] (restricted)
  17. repec:att:wimass:19966 is not listed on IDEAS
  18. repec:att:wimass:199530r is not listed on IDEAS
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