A prototype model of speculative dynamics with position-based trading
The paper extracts a prototype asset pricing model from the literature where a market maker adjusts prices in response to order imbalances and the strategies of fundamentalists and chartists are position-based, that is, the two groups are specified in terms of their desired holdings. The deterministic formulation of the model leads to a neutral delay-differential equation of the price, whose mathematical analysis is non-standard and may be of independent interest. The stability conditions are nevertheless quite analogous to the order-based Beja-Goldman model. The effects of parameter variations are also studied in a stochastic setting, where special emphasis is put on the misalignment between price and the time-varying fundamental value, the market maker's risk aversion, and the differential profits of fundamentalists and chartists.
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- Frank Westerhoff, 2003. "Market-maker, inventory control and foreign exchange dynamics," Quantitative Finance, Taylor & Francis Journals, vol. 3(5), pages 363-369.
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- Rui Carvalho, 2001. "The Dynamics of the Linear Random Farmer Model," Papers cond-mat/0107150, arXiv.org.
- He, Xue-Zhong & Li, Youwei, 2007. "Power-law behaviour, heterogeneity, and trend chasing," Journal of Economic Dynamics and Control, Elsevier, vol. 31(10), pages 3396-3426, October.
- Futia, Carl A, 1982. "Invariant Distributions and the Limiting Behavior of Markovian Economic Models," Econometrica, Econometric Society, vol. 50(2), pages 377-408, March.
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