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Market Stability Switches in a Continuous-Time Financial Market with Heterogeneous Beliefs

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Abstract

By considering a financial market of fundamentalists and trend followers in which the price trend of the trend followers is formed as a weighted average of historical prices, we establish a continuous-time financial market model with time delay and examines the impact of time delay on market price dynamics. Conditions for the stability of the fundamental price in terms of agents' behavior parameters and time delay are obtained. In particular, it is found that an increase in time delay can not only destabilize the market price but also stabilize an otherwise unstable market price, leading to stability switching as delay increases. This interesting phenomena shed new light in understanding of mechanism on the market stability. When the fundamental price becomes unstable through Hopf bifurcations, suffcient conditions on the stability and global existence of the periodic solution are obtained.

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File URL: http://www.business.uts.edu.au/qfrc/research/research_papers/rp252.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 252.

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Length: 26
Date of creation: 01 Jul 2009
Date of revision:
Handle: RePEc:uts:rpaper:252

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Keywords: asset price; fundamentalists; trend followers; delay differential equations; stability; bifurcations;

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Cited by:
  1. Xue-Zhong He & Kai Li, 2014. "Time Series Momentum and Market Stability," Research Paper Series 341, Quantitative Finance Research Centre, University of Technology, Sydney.
  2. He, Xue-Zhong & Zheng, Min, 2010. "Dynamics of moving average rules in a continuous-time financial market model," Journal of Economic Behavior & Organization, Elsevier, vol. 76(3), pages 615-634, December.
  3. He, Xue-Zhong & Li, Kai, 2012. "Heterogeneous beliefs and adaptive behaviour in a continuous-time asset price model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(7), pages 973-987.
  4. Xue-Zhong He & Kai Li, 2011. "Heterogeneous Beliefs and Adaptive Behaviour in a Continuous-Time Asset Price Model," Research Paper Series 291, Quantitative Finance Research Centre, University of Technology, Sydney.
  5. Corrado Di Guilmi & Xue-Zhong He & Kai Li, 2013. "Herding, Trend Chasing and Market Volatility," Research Paper Series 337, Quantitative Finance Research Centre, University of Technology, Sydney.

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