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Regional Financial Markets With Common Currency

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Author Info

  • Weihong HUANG

    (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore)

  • Zhenxi CHEN

    (Division of Economics, Nanyang Technological University, Singapore 637332, Singapore)

Abstract

With the development of globalization and regional market integration, regional markets with common currency emerge. We develop a heterogeneous agents model based on the frameworks of Day and Huang (1990) as well as Westerhoff and Dieci (2006). Two markets using same currency are populated by chartists and fundamentalists. Market linkage is established by allowing investors to trade in both markets. One of the consequences of market linkage is market pooling, in which investors from each market interact with each other and determine the price movements of the market system. The market that is more stable initially exerts stabilizing force on the market system while itself might su¤er from destabilizing effect. Market system based on the model demonstrates the capability to generate important stylized facts of financial markets, in particular the significant cross-correlation between two markets.

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Bibliographic Info

Paper provided by Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre in its series Economic Growth centre Working Paper Series with number 1210.

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Length: 26 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:nan:wpaper:1210

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Related research

Keywords: Financial multi-market interactions; Market integration; Market Pooling; Chaos; Heterogeneous beliefs;

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References

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  1. Donaldson, R. Glen & Kim, Harold Y., 1993. "Price Barriers in the Dow Jones Industrial Average," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 28(03), pages 313-330, September.
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  3. Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
  4. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2006. "More hedging instruments may destabilize markets," CeNDEF Working Papers 06-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  6. Xue-Zhong He & Youwei Li, 2008. "Heterogeneity, convergence, and autocorrelations," Quantitative Finance, Taylor & Francis Journals, vol. 8(1), pages 59-79.
  7. R. Cont, 2001. "Empirical properties of asset returns: stylized facts and statistical issues," Quantitative Finance, Taylor & Francis Journals, vol. 1(2), pages 223-236.
  8. J. Doyne Farmer & Shareen Joshi, 2000. "The price dynamics of common trading strategies," Papers cond-mat/0012419, arXiv.org.
  9. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  10. Jan Wenzelburger & Volker Boehm, 2004. "On the performance of efficient portfolios," Computing in Economics and Finance 2004 197, Society for Computational Economics.
  11. Balázs Égert & Evžen Kočenda, 2011. "Time-varying synchronization of European stock markets," Empirical Economics, Springer, vol. 40(2), pages 393-407, April.
  12. Dieci, Roberto & Westerhoff, Frank, 2010. "Heterogeneous speculators, endogenous fluctuations and interacting markets: A model of stock prices and exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 743-764, April.
  13. Xue-Zhong He & Frank H. Westerhoff, 2004. "Commodity Markets, Price Limiters and Speculative Price Dynamics," Research Paper Series 136, Quantitative Finance Research Centre, University of Technology, Sydney.
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Cited by:
  1. Weihong HUANG & Zhenxi CHEN, 2012. "Heterogeneous Agents in Multi-markets: A Coupled Map Lattices Approach," Economic Growth centre Working Paper Series 1211, Nanyang Technolgical University, School of Humanities and Social Sciences, Economic Growth centre.

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