The stochastic bifurcation behaviour of speculative financial markets
This paper establishes a continuous-time stochastic asset pricing model in a speculative financial market with fundamentalists and chartists by introducing a noisy fundamental price. By application of stochastic bifurcation theory, the limiting market equilibrium distribution is examined numerically. It is shown that speculative behaviour of chartists can cause the market price to display different forms of equilibrium distributions. In particular, when chartists are less active, there is a unique equilibrium distribution which is stable. However, when the chartists become more active, a new equilibrium distribution will be generated and become stable. The corresponding stationary density will change from a single peak to a crater-like density. The change of stationary distribution is characterized by a bimodal logarithm price distribution and fat tails. The paper demonstrates that stochastic bifurcation theory is a useful tool in providing insight into various types of financial market behaviour in a stochastic environment.
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Volume (Year): 387 (2008)
Issue (Month): 15 ()
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- Volker Böhm & Carl Chiarella, 2005.
"Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices,"
Wiley Blackwell, vol. 15(1), pages 61-97.
- Volker Bohm & Carl Chiarella, 2000. "Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices," Research Paper Series 46, Quantitative Finance Research Centre, University of Technology, Sydney.
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- Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- Follmer, Hans & Horst, Ulrich & Kirman, Alan, 2005. "Equilibria in financial markets with heterogeneous agents: a probabilistic perspective," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 123-155, February. Full references (including those not matched with items on IDEAS)
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