A Dynamic Analysis of Speculation Across Two Markets
A discrete time model of a financial market is proposed, where the time evolution of asset prices and wealth arises from the interaction of two groups of agents, fundamentalists and chartists. Each group allocates its wealth between a risky asset (stock) and an alternative asset (bond), and the two groups have heterogeneous expectations about returns. We assume that chartists compute expected returns by extrapolating past price changes, while fundamentalists form their expectations on the basis of their superior knowledge of fundamentals. Under the assumption that agents have CRRA utility, investors' optimal demand for each asset depends on their wealth, and this results in growing price and wealth processes. The time evolution of the prices is modeled by assuming the existence of a market maker, who sets excess demand of each asset to zero at the end of each trading period by taking an off-setting long or short position. The market maker is assumed to adjust the price, in each period, partly on the basis of the excess demand and partly according to a particular market stabilization policy. The model is reduced to a high dimensional nonlinear discrete-time dynamical system with growing prices and wealth. Although the model is nonstationary, suitable changes of variables lead to a stationary model where the dynamic variables are actual and expected returns, fundamental/price ratios, and wealth proportions of chartists and fundamentalists. The steady states and other invariant sets of the model are determined, and important global dynamic phenomena are studied via numerical techniques. Stochastic simulations are also performed, that show the ability of the model to generate some of the characteristic features of financial time series.
|Date of creation:||01 Jan 2003|
|Date of revision:|
|Publication status:||Published as: Chiarella, C., Dieci, R. and Gardini, L., 2004, "A Dynamic Analysis of Speculation Across Two Markets", In: The Complex Dynamics of Economic Interaction: Lecture Notes in Economics and Mathematical Systems, Vol: 531, 197-212.|
|Contact details of provider:|| Postal: PO Box 123, Broadway, NSW 2007, Australia|
Phone: +61 2 9514 7777
Fax: +61 2 9514 7711
Web page: http://www.qfrc.uts.edu.au/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Brock, W.A. & Hommes, C.H., 1996.
"Hetergeneous Beliefs and Routes to Chaos in a Simple Asset Pricing Model,"
9621, Wisconsin Madison - Social Systems.
- 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.
- Fernando Fernandez-Rodriguez & Maria-Dolores Garcia-Artiles & Juan Manuel Martin-Gonzalez, 2002. "A model of speculative behaviour with a strange attractor," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(3), pages 143-161.
- Day, Richard H. & Huang, Weihong, 1990.
"Bulls, bears and market sheep,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 14(3), pages 299-329, December.
- Beja, Avraham & Goldman, M Barry, 1980. " On the Dynamic Behavior of Prices in Disequilibrium," Journal of Finance, American Finance Association, vol. 35(2), pages 235-48, May.
- Zeeman, E. C., 1974. "On the unstable behaviour of stock exchanges," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 39-49, March.
- Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
- Brock, W.A., 1995.
"A Rational Route to Randomness,"
9530, Wisconsin Madison - Social Systems.
- Chiarella, Carl & He, Xue-Zhong, 2003.
"Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker,"
Cambridge University Press, vol. 7(04), pages 503-536, September.
- Carl Chiarella & Xue-Zhong He, 2000. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model with a Market Maker," Research Paper Series 35, Quantitative Finance Research Centre, University of Technology, Sydney.
- Carl Chiarella & Xue-Zhong He, 1999.
"Heterogeneous Beliefs, Risks and Learning in a Simple Asset Pricing Model,"
Research Paper Series
18, Quantitative Finance Research Centre, University of Technology, Sydney.
- Chiarella, Carl & He, Xue-Zhong, 2002. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset Pricing Model," Computational Economics, Society for Computational Economics, vol. 19(1), pages 95-132, February.
- Xue-Zhong He & Carl Chiarella, 1999. "Heterogeneous Beliefs, Risk and Learning in a Simple Asset-Pricing Model," Computing in Economics and Finance 1999 223, Society for Computational Economics.
- Madhavan, Ananth & Smidt, Seymour, 1993. " An Analysis of Changes in Specialist Inventories and Quotations," Journal of Finance, American Finance Association, vol. 48(5), pages 1595-1628, December.
- C. Chiarella & X-Z. He, 2001.
"Asset price and wealth dynamics under heterogeneous expectations,"
Taylor & Francis Journals, vol. 1(5), pages 509-526.
- Xue-Zhong (Tony) He & Carl Chiarella, 2001. "Asset Price and Wealth Dynamics under Heterogeneous Expectations," CeNDEF Workshop Papers, January 2001 5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Carl Chiarella & Xue-Zhong He, 2001. "Asset Price and Wealth Dynamics Under Heterogeneous Expectations," Research Paper Series 56, Quantitative Finance Research Centre, University of Technology, Sydney.
- Carl Chiarella & Roberto Dieci & Laura Gardini, 2001.
"Speculative Behaviour and Complex Asset Price Dynamics,"
Research Paper Series
49, Quantitative Finance Research Centre, University of Technology, Sydney.
- 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.
- Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- Madhavan, Ananth, 2000. "Market microstructure: A survey," Journal of Financial Markets, Elsevier, vol. 3(3), pages 205-258, August.
- Gaunersdorfer, Andrea, 2000. "Endogenous fluctuations in a simple asset pricing model with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 799-831, June.
When requesting a correction, please mention this item's handle: RePEc:uts:rpaper:89. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Duncan Ford)
If references are entirely missing, you can add them using this form.