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Market stability switches in a continuous-time financial market with heterogeneous beliefs

Listed author(s):
  • He, Xue-Zhong
  • Li, Kai
  • Wei, Junjie
  • Zheng, Min

By considering a financial market of fundamentalists and trend followers in which the price trend of trend followers is formed as a weighted average of historical prices, we establish a continuous-time financial market model with time delay and examine 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. These interesting phenomena shed new light in understanding of mechanism on the market stability. When the fundamental price becomes unstable through Hopf bifurcations, sufficient conditions on the stability and global existence of the periodic solution are obtained.

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File URL: http://www.sciencedirect.com/science/article/pii/S0264-9993(09)00128-X
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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 6 (November)
Pages: 1432-1442

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1432-1442
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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