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A model of speculative behaviour with a strange attractor

A model of speculative behaviour with a strange attractor An asset pricing model for a speculative financial market with fundamentalists and chartists is analysed. The model explains bursts of volatility in financial markets, which are not well explained by the traditional finance paradigms. Speculative bubbles arise as a complex non-linear dynamic phenomenon brought about naturally by the dynamic interaction of heterogeneous market participants. Depending on the time lag in the formation of chartists' expectations, the system evolves through several dynamic regimes, finishing in a strange attractor. Chaos provides a self-sustained motion around the rationally expected equilibrium that corresponds to a speculative bubble. In order to explain the role of Chartism, chaotic motion is a very interesting theoretical feature for a speculative financial market model. It provides a complex non-linear dynamic behaviour around the Walrasian equilibrium price produced by deterministic interactions between fundamentalists and chartists. This model could be a link between two opposite views over the behaviour of financial markets: the theorist's literature view that claims the random motion of asset prices, and the chartist's position extensively adopted by market professionals. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Applied Mathematical Finance Taylor & Francis

A model of speculative behaviour with a strange attractor

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A model of speculative behaviour with a strange attractor

Abstract

An asset pricing model for a speculative financial market with fundamentalists and chartists is analysed. The model explains bursts of volatility in financial markets, which are not well explained by the traditional finance paradigms. Speculative bubbles arise as a complex non-linear dynamic phenomenon brought about naturally by the dynamic interaction of heterogeneous market participants. Depending on the time lag in the formation of chartists' expectations, the system evolves through...
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Publisher
Taylor & Francis
Copyright
Copyright Taylor & Francis Group, LLC
ISSN
1466-4313
eISSN
1350-486X
DOI
10.1080/13504860210159032
Publisher site
See Article on Publisher Site

Abstract

An asset pricing model for a speculative financial market with fundamentalists and chartists is analysed. The model explains bursts of volatility in financial markets, which are not well explained by the traditional finance paradigms. Speculative bubbles arise as a complex non-linear dynamic phenomenon brought about naturally by the dynamic interaction of heterogeneous market participants. Depending on the time lag in the formation of chartists' expectations, the system evolves through several dynamic regimes, finishing in a strange attractor. Chaos provides a self-sustained motion around the rationally expected equilibrium that corresponds to a speculative bubble. In order to explain the role of Chartism, chaotic motion is a very interesting theoretical feature for a speculative financial market model. It provides a complex non-linear dynamic behaviour around the Walrasian equilibrium price produced by deterministic interactions between fundamentalists and chartists. This model could be a link between two opposite views over the behaviour of financial markets: the theorist's literature view that claims the random motion of asset prices, and the chartist's position extensively adopted by market professionals.

Journal

Applied Mathematical Finance – Taylor & Francis

Published: Sep 1, 2002

Keywords: Bubbles; Technical Analysis; Charting; Market Speculation; Deterministic Chaos

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