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Dynamic Effects of Increasing Heterogeneity in Financial Markets

Author

Listed:
  • Ahmad Naimzada

    () (Department of Economics, University of Milan-Bicocca)

  • Giorgio Ricchiuti

Abstract

Developing a model in which heterogeneity arises among two groups of fundamentalists that follow gurus, we focus on the dynamic effects of increasing heterogeneity. We show that an increasing degree of heterogeneity leads firstly (i) to insurgence of a pitchfork bifurcation and, secondly (ii) generates, together with a larger reaction to misalignment of both market makers and agents, the appearance of a periodic, or even, chaotic, price fluctuation (trough an homoclinic bifurcation, [1]).

Suggested Citation

  • Ahmad Naimzada & Giorgio Ricchiuti, 2007. "Dynamic Effects of Increasing Heterogeneity in Financial Markets," Working Papers 111, University of Milano-Bicocca, Department of Economics, revised 2007.
  • Handle: RePEc:mib:wpaper:111
    as

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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper111.pdf
    File Function: First version, 2007
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    References listed on IDEAS

    as
    1. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
    2. Chiarella, Carl & Dieci, Roberto & He, Xue-Zhong, 2007. "Heterogeneous expectations and speculative behavior in a dynamic multi-asset framework," Journal of Economic Behavior & Organization, Elsevier, vol. 62(3), pages 408-427, March.
    3. He, Xue-Zhong & Westerhoff, Frank H., 2005. "Commodity markets, price limiters and speculative price dynamics," Journal of Economic Dynamics and Control, Elsevier, vol. 29(9), pages 1577-1596, September.
    4. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2002. "Speculative behaviour and complex asset price dynamics: a global analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 49(2), pages 173-197, October.
    5. Taisei Kaizoji, 2003. "Speculative bubbles and fat tail phenomena in a heterogeneous agent model," Papers nlin/0312040, arXiv.org.
    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.
    7. Carl Chiarella & Xue-Zhong He & Duo Wang, 2004. "A Behavioural Asset Pricing Model with a Time-Varying Second Moment," Research Paper Series 141, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. Ahmad Naimzada & Giorgio Ricchiuti, 2006. "Heterogeneous Fundamentalists and Imitative Processes," Working Papers 104, University of Milano-Bicocca, Department of Economics, revised Nov 2006.
    9. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. repec:spr:joevec:v:27:y:2017:i:5:d:10.1007_s00191-017-0506-8 is not listed on IDEAS
    2. Ahmad K. Naimzada & Giorgio Ricchiuti, 2014. "Complexity with Heterogeneous Fundamentalists and a Multiplicative Price Mechanism," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 43(3), pages 233-247, November.
    3. Alessandro Carraro & Giorgio Ricchiuti, 2014. "Heterogeneous Fundamentalists and Market Maker Inventories," Working Papers - Economics wp2014_16.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    4. Kaltwasser, Pablo Rovira, 2010. "Uncertainty about fundamentals and herding behavior in the FOREX market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(6), pages 1215-1222.
    5. Ahmad Naimzada & Marina Pireddu, 2014. "Real and financial interacting oscillators: a behavioral macro-model with animal spirits," Working Papers 268, University of Milano-Bicocca, Department of Economics, revised Feb 2014.

    More about this item

    Keywords

    mathematical economics; chaos; heterogeneous interacting agents; financial markets;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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