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A model of financial market dynamics with heterogeneous beliefs and state-dependent confidence

Chiarella, C.; Dieci, R.; Gardini, L.; Sbragia, L.

Authors

C. Chiarella

R. Dieci

L. Gardini



Abstract

In a simple model of financial market dynamics, we allow the price of a risky security to be set by a market maker depending on the excess demand of heterogeneous interacting traders, fundamentalists and chartists, who place their orders based upon different expectations schemes about future prices: while chartists rely on standard trend-based rules, fundamentalists are assumed to know the economic environment and to form their beliefs accordingly. As price moves away from the long-run fundamental, fundamentalists become less confident in their forecasts, and put increasing weight on a reversion towards the fundamental price. The resulting two-dimensional discrete time dynamical system can exhibit a rich range of dynamic scenarios, often characterized by coexistence of attractors. A simple noisy version of the model reveals a variety of possible patterns for return time series.

Citation

Chiarella, C., Dieci, R., Gardini, L., & Sbragia, L. (2008). A model of financial market dynamics with heterogeneous beliefs and state-dependent confidence. Computational Economics, 32(1/2), 55-72. https://doi.org/10.1007/s10614-008-9131-9

Journal Article Type Article
Publication Date Sep 1, 2008
Deposit Date May 22, 2009
Journal Computational Economics
Print ISSN 0927-7099
Electronic ISSN 1572-9974
Publisher Springer
Peer Reviewed Peer Reviewed
Volume 32
Issue 1/2
Pages 55-72
DOI https://doi.org/10.1007/s10614-008-9131-9
Keywords Heterogeneous beliefs, Financial market dynamics, Bifurcation analysis, Coexisting attractors.
Public URL https://durham-repository.worktribe.com/output/1529991

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