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Integrating Real Sector Growth and Inflation Into An Agent-Based Stock Market Dynamics

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  • Franke, Reiner
  • Ghonghadze, Jaba

Abstract

Concentrating on speculative flow rather than stock demand, the paper puts forward a deterministic continuous-time model of the equity market that is compatible with a growing and inflationary economy. Instead of the systematically rising equity price, the central state variable in now Tobin's q, which makes it necessary to consider explicitly the financing of fixed investment in the real sector. Integrating a number of suitable re-specifications and fixing the variables in the real sector, the model succeeds in the re-establishing (almost) the same mathematical structure as the elegant two-dimensional Lux (1995) model, which implicitly was set up in the usual stationary and non-inflationary environment. Thus a speculative dynamics is obtained that can generate persistent oscillations as well as bubble equilibria and a rich sequence of local and global bifurcations. The model is ready to be combined with the growth cycles in a real sector, where the short-term fluctuations of Tobin's q may then also affect aggregate demand.

Suggested Citation

  • Franke, Reiner & Ghonghadze, Jaba, 2014. "Integrating Real Sector Growth and Inflation Into An Agent-Based Stock Market Dynamics," FinMaP-Working Papers 4, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    • Handle: RePEc:zbw:fmpwps:4
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    References listed on IDEAS

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    Cited by:

    1. Serena Sordi & Marwil J. Dávila-Fernández, 2020. "Investment behaviour and “bull & bear” dynamics: modelling real and stock market interactions," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 15(4), pages 867-897, October.
    2. Flaschel, Peter & Charpe, Matthieu & Galanis, Giorgos & Proaño, Christian R. & Veneziani, Roberto, 2018. "Macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 237-256.
    3. Dimitri Kroujiline & Maxim Gusev & Dmitry Ushanov & Sergey V. Sharov & Boris Govorkov, 2018. "An Endogenous Mechanism of Business Cycles," Papers 1803.05002, arXiv.org, revised Sep 2019.
    4. Yanovski, Boyan, 2016. "A pro-cyclical stock market under a countercyclical monetary policy in a model of endogenous business cycles," FinMaP-Working Papers 60, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.

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    More about this item

    Keywords

    speculative dynamics; stock price inflation; herding; logit dynamics; bifurcations;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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