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Heterogeneous traders, price-volume signals, and complex asset price dynamics

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  • Frank H. Westerhoff

Abstract

We seek to develop a novel asset pricing model with heterogeneous traders. Fundamental traders expect that asset prices converge towards their intrinsic values, whereas chart traders rely on both price and volume signals to determine their orders. To be precise, the larger the trading volume, the more they believe in the persistence of the current price trend. Simulations of our nonlinear deterministic model reveal that interactions between fundamentalists and chartists may cause intricate endogenous price fluctuations. Contrary to the intuition, we find that chart trading may increase market stability.

Suggested Citation

  • Frank H. Westerhoff, 2005. "Heterogeneous traders, price-volume signals, and complex asset price dynamics," Discrete Dynamics in Nature and Society, Hindawi, vol. 2005, pages 1-11, January.
    • Handle: RePEc:hin:jnddns:610803
    DOI: 10.1155/DDNS.2005.19
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    References listed on IDEAS

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    5. Carl Chairella & Roberto Dieci & Laura Gardini, 2001. "Asset price dynamics in a financial market with fundamentalists and chartists," Discrete Dynamics in Nature and Society, Hindawi, vol. 6, pages 1-31, January.
    6. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
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    8. Honggang Li & J. Barkley Rosser, 2001. "Emergent volatility in asset markets with heterogeneous agents," Discrete Dynamics in Nature and Society, Hindawi, vol. 6, pages 1-10, January.
    9. Westerhoff, Frank, 2003. "Speculative markets and the effectiveness of price limits," Journal of Economic Dynamics and Control, Elsevier, vol. 28(3), pages 493-508, December.
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    Cited by:

    1. Orlando Gomes, 2008. "Decentralized Allocation of Human Capital and Nonlinear Growth," Computational Economics, Springer;Society for Computational Economics, vol. 31(1), pages 45-75, February.

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