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The Transition from Brownian Motion to Boom-and-Bust Dynamics in Financial and Economic Systems

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  • Harbir Lamba

Abstract

Quasi-equilibrium models for aggregate variables are widely-used throughout finance and economics. The validity of such models depends crucially upon assuming that the systems' participants behave both independently and in a Markovian fashion. We present a simplified market model to demonstrate that herding effects between agents can cause a transition to boom-and-bust dynamics at realistic parameter values. The model can also be viewed as a novel stochastic particle system with switching and reinjection.

Suggested Citation

  • Harbir Lamba, 2012. "The Transition from Brownian Motion to Boom-and-Bust Dynamics in Financial and Economic Systems," Papers 1209.4629, arXiv.org.
  • Handle: RePEc:arx:papers:1209.4629
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    File URL: http://arxiv.org/pdf/1209.4629
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