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Dynamic behavior of real and stock markets with a varying degree of interaction

Author

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  • Ahmad Naimzada
  • Marina Pireddu

Abstract

We develop a macroeconomic behavioral model in order to analyze the interactions between real and financial markets. The real subsystem is represented by a simple Keynesian income-expenditure model, while the financial subsystem is represented by an equilibrium stock market with heterogeneous speculators, i.e., chartists and fundamentalists. The interactions between the two markets are modeled in the following way: the aggregate demand depends, among other variables, also on the stock market price, while the fundamental value used by speculators in their decisional process depends on real economic conditions. In our model we introduce a parameter that represents the degree of interaction. With the aid of analytical and numerical tools we show that an increasing degree of interaction between markets tends to locally stabilize the system. This stabilization occurs via a sequence of period-halving bifurcations. Globally, we find that the stabilization process implies multistability, i.e., the coexistence of different kinds of attractors.

Suggested Citation

  • Ahmad Naimzada & Marina Pireddu, 2013. "Dynamic behavior of real and stock markets with a varying degree of interaction," Working Papers 245, University of Milano-Bicocca, Department of Economics, revised Jun 2013.
  • Handle: RePEc:mib:wpaper:245
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    File URL: http://dems.unimib.it/repec/pdf/mibwpaper245.pdf
    File Function: First version, 2013
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    References listed on IDEAS

    as
    1. Ahmad Naimzada & Marina Pireddu, 2013. "Dynamics in a nonlinear Keynesian good market model," Working Papers 254, University of Milano-Bicocca, Department of Economics, revised Sep 2013.
    2. Matthias Lengnick & Hans-Werner Wohltmann, 2013. "Agent-based financial markets and New Keynesian macroeconomics: a synthesis," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 8(1), pages 1-32, April.
    3. Hommes,Cars, 2015. "Behavioral Rationality and Heterogeneous Expectations in Complex Economic Systems," Cambridge Books, Cambridge University Press, number 9781107564978.
    4. Charpe, Matthieu & Flaschel, Peter & Hartmann, Florian & ProaƱo, Christian, 2011. "Stabilizing an unstable economy: Fiscal and monetary policy, stocks, and the term structure of interest rates," Economic Modelling, Elsevier, vol. 28(5), pages 2129-2136, September.
    5. Scheffknecht, Lukas & Geiger, Felix, 2011. "A behavioral macroeconomic model with endogenous boom-bust cycles and leverage dynamcis," FZID Discussion Papers 37-2011, University of Hohenheim, Center for Research on Innovation and Services (FZID).
    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Lengnick, Matthias & Wohltmann, Hans-Werner, 2016. "Optimal monetary policy in a new Keynesian model with animal spirits and financial markets," Journal of Economic Dynamics and Control, Elsevier, vol. 64(C), pages 148-165.
    2. 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

    Interacting markets; bifurcation; stabilization; complex dynamics; multistability;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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