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Market Mood, Adaptive Beliefs and Asset Price Dynamics

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Empirical evidence has suggested that, facing different trading strategies and complicated decision, the proportions of agents relying on particular strategies may stay at constant level or vary over time. This paper presents a simple "dynamic market fraction" model of two groups of traders, fundamentalists and trend followers, under a market maker scenario. Market mood and evolutionary adaption are characterized by fixed and adaptive switching fraction among two groups, respectively. Using local stability and bifurcation analysis, as well as numerical simulation, the role played by the key parameters in the market behaviour is examined. Particular attention is payed to the impact of the market fraction, determined by the fixed proportions of confident fundamentalists and trend followers, and by the proportion of adaptively rational agents, who adopt different strategies over time depending on realized profits.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp162.pdf
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Bibliographic Info

Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 162.

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Length: 23
Date of creation: 01 Aug 2005
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Handle: RePEc:uts:rpaper:162

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Cited by:
  1. Christian R. Proano, 2009. "Heterogenous Behavioral Expectations, FX Fluctuations and Dynamic Stability in a Stylized Two-Country Macroeconomic Model," IMK Working Paper 03-2009, IMK at the Hans Boeckler Foundation, Macroeconomic Policy Institute.
  2. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
  3. Mauro Sodini, 2011. "Local and Global Dynamics in an Overlapping Generations Model with Endogenous Time Discounting," Computational Economics, Society for Computational Economics, vol. 38(3), pages 277-293, October.
  4. ProaƱo, Christian R., 2011. "Exchange rate determination, macroeconomic dynamics and stability under heterogeneous behavioral FX expectations," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 177-188, February.
  5. Sanjeev K. Routray, 2006. "Two Kinds of Activism: Reflections on Citizenship in Globalising Delhi," Working Papers id:463, eSocialSciences.
  6. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2011. "The dynamic behaviour of asset prices in disequilibrium: a survey," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 2(2), pages 101-139.
  7. Loretti I. Dobrescu & Mihaela Neamtu & Dumitru Opris, 2011. "A Discrete--Delay Dynamic Model for the Stock Market," Discussion Papers 2012-11, School of Economics, The University of New South Wales.

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