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Asset Price Dynamics in a Financial Market with Heterogeneous Trading Strategies and Time Delays

  • Alessandro Sansone

    (Department of Economic Sciences; University of Rome “La Sapienza” & School of Finance & Economics; University of Technology, Sydney)

  • Giuseppe Garofalo

    (Department of Managerial, Technological & Quantitative Studies; University of Viterbo “Tuscia” & Department of Public Economics; University of Rome “La Sapienza”)

In this paper we present a continuous time dynamical model of heterogeneous agents interacting in a financial market where transactions are cleared by a market maker. The market is composed of fundamentalist, trend following and contrarian agents who process information from the market with different time delays. Each class of investors is characterized by path dependent risk aversion. We also allow for the possibility of evolutionary switching between trend following and contrarian strategies. We find that the system shows periodic, quasi-periodic and chaotic dynamics as well as synchronization between technical traders. Furthermore, the model is able to generate time series of returns that exhibit statistical properties similar to those of the S&P500 index, which is characterized by excess kurtosis, volatility clustering and long memory.

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File URL: http://econwpa.repec.org/eps/fin/papers/0510/0510026.pdf
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Paper provided by EconWPA in its series Finance with number 0510026.

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Length: 23 pages
Date of creation: 24 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0510026
Note: Type of Document - pdf; pages: 23
Contact details of provider: Web page: http://econwpa.repec.org

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  1. repec:att:wimass:9530 is not listed on IDEAS
  2. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
  3. Gaunersdorfer, A. & Hommes, C.H., 2005. "A nonlinear structural model for volatility clustering," CeNDEF Working Papers 05-02, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
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  6. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March.
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  8. 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.
  9. 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.
  10. 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.
  11. 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.
  12. Chiarella, Carl & He, Xue-Zhong, 2003. "Heterogeneous Beliefs, Risk, And Learning In A Simple Asset-Pricing Model With A Market Maker," Macroeconomic Dynamics, Cambridge University Press, vol. 7(04), pages 503-536, September.
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  15. Xue-Zhong He, 2003. "Asset Pricing, Volatility and Market Behaviour: A Market Fraction Approach," Research Paper Series 95, Quantitative Finance Research Centre, University of Technology, Sydney.
  16. Carl Chiarella & Roberto Dieci & Laura Gardini, 2005. "The Dynamic Interaction of Speculation and Diversification," Applied Mathematical Finance, Taylor & Francis Journals, vol. 12(1), pages 17-52.
  17. repec:att:wimass:9606 is not listed on IDEAS
  18. 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.
  19. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  20. Day, R. & Huang, W., 1988. "Bulls, Bears And Market Sheep," Papers m8822, Southern California - Department of Economics.
  21. Frank Westerhoff, 2004. "Market depth and price dynamics: A note," Papers cond-mat/0403723, arXiv.org.
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