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A micro-foundation of a simple financial model with finite-time singularity bubble and its agent-based simulation

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  • Naohiro Yoshida

Abstract

This paper proposes a mathematical model of financial security prices in continuous time with bubbles in which prices may diverge and crash in finite time. Just before the bubbles burst, prices increase super-exponentially. In addition, a discrete-time excess demand model is proposed to provide a micro-foundation for the continuous-time model. The derived discrete-time security price model has the same characteristics as the continuous-time price model and expresses the finite-time singularity. Furthermore, based on the excess demand model, an agent-based simulation is performed to check the price behavior. As expected, we can confirm that prices can diverge in finite time and increase super-exponentially.

Suggested Citation

  • Naohiro Yoshida, 2023. "A micro-foundation of a simple financial model with finite-time singularity bubble and its agent-based simulation," Economics and Business Letters, Oviedo University Press, vol. 12(4), pages 277-283.
    • Handle: RePEc:ove:journl:aid:19771
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    File URL: https://reunido.uniovi.es/index.php/EBL/article/view/19771
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    References listed on IDEAS

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    3. Sornette, Didier & Woodard, Ryan & Yan, Wanfeng & Zhou, Wei-Xing, 2013. "Clarifications to questions and criticisms on the Johansen–Ledoit–Sornette financial bubble model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(19), pages 4417-4428.
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