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A simple financial market model with chartists and fundamentalists: market entry levels and discontinuities

Author

Listed:
  • Fabio Tramontana

    (Department of Economics and Quantitative Methods, University of Pavia)

  • Frank Westerhoff

    (Department of Economics, University of Bamberg)

  • Laura Gardini

    (Department of Economics, Society and Politics, University of Urbino)

Abstract

We present a simple financial market model with interacting chartists and fundamentalists. Since some of these speculators only become active when a certain misalignment level has been crossed, the dynamics are driven by a discontinuous piecewise linear map. The model endogenously generates bubbles and crashes and excess volatility for a broad range of parameter values - and thus explains some key phenomena of financial markets. Moreover, we provide a complete analytical study of the model's dynamical system. One of its surprising features is that model simulations may appear to be chaotic, although only regular dynamics can emerge.

Suggested Citation

  • Fabio Tramontana & Frank Westerhoff & Laura Gardini, 2011. "A simple financial market model with chartists and fundamentalists: market entry levels and discontinuities," Quaderni di Dipartimento 150, University of Pavia, Department of Economics and Quantitative Methods.
  • Handle: RePEc:pav:wpaper:150
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    References listed on IDEAS

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    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.
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    3. Tramontana, Fabio & Westerhoff, Frank & Gardini, Laura, 2010. "On the complicated price dynamics of a simple one-dimensional discontinuous financial market model with heterogeneous interacting traders," Journal of Economic Behavior & Organization, Elsevier, vol. 74(3), pages 187-205, June.
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    11. Alan Kirman, 1993. "Ants, Rationality, and Recruitment," The Quarterly Journal of Economics, Oxford University Press, vol. 108(1), pages 137-156.
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    Cited by:

    1. Sushko, Iryna & Tramontana, Fabio & Westerhoff, Frank & Avrutin, Viktor, 2015. "Symmetry breaking in a bull and bear financial market model," Chaos, Solitons & Fractals, Elsevier, vol. 79(C), pages 57-72.
    2. Tramontana, Fabio & Westerhoff, Frank & Gardini, Laura, 2013. "The bull and bear market model of Huang and Day: Some extensions and new results," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2351-2370.
    3. Jungeilges, Jochen & Maklakova, Elena & Perevalova, Tatyana, 2021. "Asset price dynamics in a “bull and bear market”," Structural Change and Economic Dynamics, Elsevier, vol. 56(C), pages 117-128.
    4. Fabio Tramontana & Frank Westerhoff & Laura Gardini, 2014. "One-dimensional maps with two discontinuity points and three linear branches: mathematical lessons for understanding the dynamics of financial markets," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 37(1), pages 27-51, April.
    5. Nguyen Tien Zung, 2017. "Second order stochastic differential models for financial markets," Papers 1707.05419, arXiv.org.
    6. Francesca Grassetti & Cristiana Mammana & Elisabetta Michetti, 2018. "Poverty trap, boom and bust periods and growth. A nonlinear model for non-developed and developing countries," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 145-162, November.
    7. En-Guo Gu, 2020. "On the Price Dynamics of a Two-Dimensional Financial Market Model with Entry Levels," Complexity, Hindawi, vol. 2020, pages 1-23, August.

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