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Dynamics of Moving Average Rules in a Continuous-time Financial Market Model

Within a continuous-time framework, this paper proposes a stochastic heterogeneous agent model (HAM) of financial markets with time delays to unify various moving average rules used indiscrete-time HAMs. The time delay represents a memory length of a moving average rule indiscrete-time HAMs.Intuitive conditions for the stability of the fundamental price of the deterministic model in terms of agents' behavior parameters and memory length are obtained. It is found that an increase in memory length not only can destabilize the market price, resulting in oscillatory market price characterized by a Hopf bifurcation, but also can stabilize another wise unstable market price, leading to stability switching as the memory length increases. Numerical simulations show that the stochastic model is able to characterize long deviations of the market price from its fundamental price and excess volatility and generate most of the stylized factso bserved in financial markets.

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File URL: http://www.qfrc.uts.edu.au/research/research_papers/rp268.pdf
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Paper provided by Quantitative Finance Research Centre, University of Technology, Sydney in its series Research Paper Series with number 268.

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Length: 34 pages
Date of creation: 01 Jan 2010
Date of revision:
Publication status: Published as: He, X. and Zheng, M., 2010, "Dynamics of Moving Average Rules in a Continuous-time Financial Market Model", Journal of Economic Behavior and Organization, 76(3), 615-634.
Handle: RePEc:uts:rpaper:268
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