IDEAS home Printed from https://ideas.repec.org/a/eee/chsofr/v170y2023ics096007792300231x.html
   My bibliography  Save this article

Heterogeneous agent-based modeling of endogenous boom-bust cycles in financial markets with adaptive expectations and dynamically switching fractions between contrarian and fundamental market entry strategies

Author

Listed:
  • Bekiros, Stelios
  • Laarem, Guessas
  • Mou, Jun
  • Al-Barakati, Abdullah A.
  • Jahanshahi, Hadi

Abstract

Financial systems present nonlinear dynamics whilst in some conditions chaotic behaviours emerge, rendering the stability of these systems utterly volatile. In this novel study we investigate boom-bust cycles in stock markets with heterogeneous agent-based modeling, yet incorporating endogenously evolving fractions of market participants, particularly those switching between contrarian and fundamental strategies. The dynamical behavior of various market entry behaviours of market agents are studied via numerical simulations and analyses of phase portraits, bifurcation diagrams and Lyapunov exponents. If the system adjusts in a partial equilibrium of at least one positive Lyapunov exponent, we observe the emergence of chaotic dynamics. Overall, chaos emerges via endogenous boom-bust cycle dynamics, caused by time-varying fractions of switching strategies between contrarian versus fundamental trading strategies. Our results prove to be invaluable to different types of market participants, such as traders, arbitrageurs, investors, speculators and institutional market makers.

Suggested Citation

  • Bekiros, Stelios & Laarem, Guessas & Mou, Jun & Al-Barakati, Abdullah A. & Jahanshahi, Hadi, 2023. "Heterogeneous agent-based modeling of endogenous boom-bust cycles in financial markets with adaptive expectations and dynamically switching fractions between contrarian and fundamental market entry st," Chaos, Solitons & Fractals, Elsevier, vol. 170(C).
    • Handle: RePEc:eee:chsofr:v:170:y:2023:i:c:s096007792300231x
    DOI: 10.1016/j.chaos.2023.113330
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S096007792300231X
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.chaos.2023.113330?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Robert J. Shiller, 2015. "Irrational Exuberance," Economics Books, Princeton University Press, edition 3, number 10421.
    2. Dieci, Roberto & Schmitt, Noemi & Westerhoff, Frank, 2018. "Interactions between stock, bond and housing markets," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 43-70.
    3. Wang, Shaojie & He, Shaobo & Yousefpour, Amin & Jahanshahi, Hadi & Repnik, Robert & Perc, Matjaž, 2020. "Chaos and complexity in a fractional-order financial system with time delays," Chaos, Solitons & Fractals, Elsevier, vol. 131(C).
    4. Maravalle, Alessandro & Claeys, Peter, 2012. "Boom–bust cycles and procyclical fiscal policy in a small open economy," Journal of Policy Modeling, Elsevier, vol. 34(5), pages 735-754.
    5. Schmitt, Noemi & Tuinstra, Jan & Westerhoff, Frank, 2017. "Side effects of nonlinear profit taxes in an evolutionary market entry model: Abrupt changes, coexisting attractors and hysteresis problems," Journal of Economic Behavior & Organization, Elsevier, vol. 135(C), pages 15-38.
    6. Fabio Tramontana & Laura Gardini & Frank Westerhoff, 2011. "Heterogeneous Speculators and Asset Price Dynamics: Further Results from a One-Dimensional Discontinuous Piecewise-Linear Map," Computational Economics, Springer;Society for Computational Economics, vol. 38(3), pages 329-347, October.
    7. Noemi Schmitt & Ivonne Schwartz & Frank Westerhoff, 2022. "Heterogeneous speculators and stock market dynamics: a simple agent-based computational model," The European Journal of Finance, Taylor & Francis Journals, vol. 28(13-15), pages 1263-1282, October.
    8. William A. Brock & Cars H. Hommes, 1997. "A Rational Route to Randomness," Econometrica, Econometric Society, vol. 65(5), pages 1059-1096, September.
    9. W J Wouter Botzen & Olivier Deschenes & Mark Sanders, 2019. "The Economic Impacts of Natural Disasters: A Review of Models and Empirical Studies," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 13(2), pages 167-188.
    10. Hellwig, Martin F., 1982. "Rational expectations equilibrium with conditioning on past prices: A mean-variance example," Journal of Economic Theory, Elsevier, vol. 26(2), pages 279-312, April.
    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. William A. Brock & Cars H. Hommes, 2001. "A Rational Route to Randomness," Chapters, in: W. D. Dechert (ed.), Growth Theory, Nonlinear Dynamics and Economic Modelling, chapter 16, pages 402-438, Edward Elgar Publishing.
    13. Soradi-Zeid, Samaneh & Jahanshahi, Hadi & Yousefpour, Amin & Bekiros, Stelios, 2020. "King algorithm: A novel optimization approach based on variable-order fractional calculus with application in chaotic financial systems," Chaos, Solitons & Fractals, Elsevier, vol. 132(C).
    14. Dubey, Pradeep & Geanakoplos, John & Shubik, Martin, 1987. "The revelation of information in strategic market games : A critique of rational expectations equilibrium," Journal of Mathematical Economics, Elsevier, vol. 16(2), pages 105-137, April.
    15. Schmitt, Noemi & Westerhoff, Frank, 2016. "Stock market participation and endogenous boom-bust dynamics," Economics Letters, Elsevier, vol. 148(C), pages 72-75.
    16. Andersson, Fredrik & Mayock, Tom, 2015. "The microdynamics of household credit use through a boom–bust cycle," Journal of Housing Economics, Elsevier, vol. 27(C), pages 22-36.
    17. Rosser, J. Barkley , Jr. & Rosser, Marina V., 2018. "Comparative Economics in a Transforming World Economy, third edition," MIT Press Books, The MIT Press, edition 3, volume 1, number 0262037335, April.
    18. Dieci, Roberto & Westerhoff, Frank, 2010. "Heterogeneous speculators, endogenous fluctuations and interacting markets: A model of stock prices and exchange rates," Journal of Economic Dynamics and Control, Elsevier, vol. 34(4), pages 743-764, April.
    19. Agliari, Anna & Naimzada, Ahmad & Pecora, Nicolò, 2018. "Boom-bust dynamics in a stock market participation model with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 458-468.
    20. Agliari, Anna & Chiarella, Carl & Gardini, Laura, 2006. "A re-evaluation of adaptive expectations in light of global nonlinear dynamic analysis," Journal of Economic Behavior & Organization, Elsevier, vol. 60(4), pages 526-552, August.
    21. Wang, Shaojie & Bekiros, Stelios & Yousefpour, Amin & He, Shaobo & Castillo, Oscar & Jahanshahi, Hadi, 2020. "Synchronization of fractional time-delayed financial system using a novel type-2 fuzzy active control method," Chaos, Solitons & Fractals, Elsevier, vol. 136(C).
    22. Chen, Shu-Bo & Jahanshahi, Hadi & Alhadji Abba, Oumate & Solís-Pérez, J.E. & Bekiros, Stelios & Gómez-Aguilar, J.F. & Yousefpour, Amin & Chu, Yu-Ming, 2020. "The effect of market confidence on a financial system from the perspective of fractional calculus: Numerical investigation and circuit realization," Chaos, Solitons & Fractals, Elsevier, vol. 140(C).
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Agliari, Anna & Naimzada, Ahmad & Pecora, Nicolò, 2018. "Boom-bust dynamics in a stock market participation model with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 458-468.
    2. Blaurock, Ivonne & Schmitt, Noemi & Westerhoff, Frank, 2018. "Market entry waves and volatility outbursts in stock markets," Journal of Economic Behavior & Organization, Elsevier, vol. 153(C), pages 19-37.
    3. Dieci, Roberto & Schmitt, Noemi & Westerhoff, Frank H., 2022. "Boom-bust cycles and asset market participation waves: Momentum, value, risk and herding," BERG Working Paper Series 177, Bamberg University, Bamberg Economic Research Group.
    4. Majewski, Adam A. & Ciliberti, Stefano & Bouchaud, Jean-Philippe, 2020. "Co-existence of trend and value in financial markets: Estimating an extended Chiarella model," Journal of Economic Dynamics and Control, Elsevier, vol. 112(C).
    5. Dieci, Roberto & Schmitt, Noemi & Westerhoff, Frank, 2018. "Interactions between stock, bond and housing markets," Journal of Economic Dynamics and Control, Elsevier, vol. 91(C), pages 43-70.
    6. Roberto Dieci & Noemi Schmitt & Frank Westerhoff, 2018. "Steady states, stability and bifurcations in multi-asset market models," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 357-378, November.
    7. Sarah Mignot & Fabio Tramontana & Frank Westerhoff, 2021. "Speculative asset price dynamics and wealth taxes," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 44(2), pages 641-667, December.
    8. Noemi Schmitt & Frank Westerhoff, 2022. "Speculative housing markets and rent control: insights from nonlinear economic dynamics," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 141-163, January.
    9. Xue-Zhong He & Kai Li & Chuncheng Wang, 2018. "Time-varying economic dominance in financial markets: A bistable dynamics approach," Published Paper Series 2018-1, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    10. Zhu, Mei & Wang, Duo & Guo, Maozheng, 2011. "Stochastic equilibria of an asset pricing model with heterogeneous beliefs and random dividends," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 131-147, January.
    11. Zhou, Shuang-Shuang & Jahanshahi, Hadi & Din, Qamar & Bekiros, Stelios & Alcaraz, Raúl & Alassafi, Madini O. & Alsaadi, Fawaz E. & Chu, Yu-Ming, 2021. "Discrete-time macroeconomic system: Bifurcation analysis and synchronization using fuzzy-based activation feedback control," Chaos, Solitons & Fractals, Elsevier, vol. 142(C).
    12. Gerunov, Anton, 2014. "Критичен Преглед На Основните Подходи За Моделиране На Икономическите Очаквания [A Critical Review of Major Approaches for Modeling Economic Expectations]," MPRA Paper 68797, University Library of Munich, Germany.
    13. Hommes, Cars, 2011. "The heterogeneous expectations hypothesis: Some evidence from the lab," Journal of Economic Dynamics and Control, Elsevier, vol. 35(1), pages 1-24, January.
    14. Schmitt, Noemi & Westerhoff, Frank, 2021. "Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets," Journal of Economic Behavior & Organization, Elsevier, vol. 192(C), pages 117-136.
    15. Li, Jun-Feng & Jahanshahi, Hadi & Kacar, Sezgin & Chu, Yu-Ming & Gómez-Aguilar, J.F. & Alotaibi, Naif D. & Alharbi, Khalid H., 2021. "On the variable-order fractional memristor oscillator: Data security applications and synchronization using a type-2 fuzzy disturbance observer-based robust control," Chaos, Solitons & Fractals, Elsevier, vol. 145(C).
    16. 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.
    17. Chu, Yu-Ming & Bekiros, Stelios & Zambrano-Serrano, Ernesto & Orozco-López, Onofre & Lahmiri, Salim & Jahanshahi, Hadi & Aly, Ayman A., 2021. "Artificial macro-economics: A chaotic discrete-time fractional-order laboratory model," Chaos, Solitons & Fractals, Elsevier, vol. 145(C).
    18. Cars Hommes, 2010. "The heterogeneous expectations hypothesis: some evidence from the lab," Post-Print hal-00753041, HAL.
    19. Di Guilmi, Corrado & Galanis, Giorgos & Proaño, Christian R., 2023. "A Baseline Model of Behavioral Political Cycles and Macroeconomic Fluctuations," Journal of Economic Behavior & Organization, Elsevier, vol. 213(C), pages 50-67.
    20. Hommes, Cars & Vroegop, Joris, 2019. "Contagion between asset markets: A two market heterogeneous agents model with destabilising spillover effects," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 314-333.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:chsofr:v:170:y:2023:i:c:s096007792300231x. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Thayer, Thomas R. (email available below). General contact details of provider: https://www.journals.elsevier.com/chaos-solitons-and-fractals .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.