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Trader Behavior and its Effect on Asset Price Dynamics

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  • James Primbs
  • Muruhan Rathinam

Abstract

In this paper, we present a natural mathematical framework to model trader behavior as a continuous time discrete event process, and derive stochastic differential equations for aggregate behavior and price dynamics by passing to diffusion limits. In particular, we model extraneous, value, momentum and hedge traders. Through analysis and numerical simulation we explore some of the effects these trading strategies have on price dynamics.

Suggested Citation

  • James Primbs & Muruhan Rathinam, 2009. "Trader Behavior and its Effect on Asset Price Dynamics," Applied Mathematical Finance, Taylor & Francis Journals, vol. 16(2), pages 151-181.
  • Handle: RePEc:taf:apmtfi:v:16:y:2009:i:2:p:151-181
    DOI: 10.1080/13504860802583444
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    References listed on IDEAS

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