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Speculative Behaviour and Complex Asset Price Dynamics

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Abstract

This paper analyses the dynamics of a model of a share market consisting of two groups of traders: fundamentalists, who form rational expectations on the fundamental value of the asset, and chartists, who base their trading decisions on an analysis of past price trends. The model is reduced to a two-dimensional map whose dynamic behaviour is analysed in detail, particularly with respect to global dynamical behaviour. The dynamics are affected by parameters measuring the strength of fundamentalist demand and the speed with which chartists adjust their estimate of the trend to past price changes. The parameter space is characterized according to the local stability/instability of the equilibrium point as well as the noninvertibility of the map. The method of critical curves of noninvertible maps is used to understand and describe the range of global bifurcations that can occur. It is also shown how the knowledge of deterministic dynamics uncovered here can aid in understanding stochastic versions of the model.

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  • 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.
    • Handle: RePEc:uts:rpaper:49
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    1. 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.
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    7. Carl Chiarella & Roberto Dieci & Laura Gardini, 2003. "A Dynamic Analysis of Speculation Across Two Markets," Research Paper Series 89, Quantitative Finance Research Centre, University of Technology, Sydney.
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