A model of financial market dynamics with heterogeneous beliefs and state-dependent confidence
- Publication Type:
- Journal Article
- Computational Economics, 2008, 32 (1-2), pp. 55 - 72
- Issue Date:
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. © Springer Science+Business Media, LLC. 2008.
Please use this identifier to cite or link to this item: