We develop a simple financial market model in which a market maker adjusts the price with respect to orders placed by chartists and fundamentalists. A novel feature of our model is that fundamentalists optimistically (pessimistically) believe in a relatively high (low) fundamental value when the financial market is increasing (decreasing). As it turns out, the dynamics of our model is driven by a two-dimensional discontinuous piecewise linear map for which we provide an in-depth analytical and numerical investigation. Among other things, we obtain in explicit form the boundaries of the periodicity regions associated with attracting cycles with rotation number 1/n, n \geq 3. These boundaries correspond to border collision bifurcations of the related cycles. We show that the periodicity regions are organized in a specific period adding structure, and some of the regions may overlap. Several examples of coexisting cycles and their basins of attraction are also presented. Economically, our results offer a new explanation for the boom-bust behavior of actual financial markets.

Gardini, L., Radi, D., Schmitt, N., Sushko, I., Westerhoff, F., Perception of Fundamental Values and Financial Market Dynamics: Mathematical Insights from a 2D Piecewise Linear Map, <<SIAM JOURNAL ON APPLIED DYNAMICAL SYSTEMS>>, 2022; 21 (4): 2314-2337. [doi:10.1137/21M1456339] [https://hdl.handle.net/10807/224968]

Perception of Fundamental Values and Financial Market Dynamics: Mathematical Insights from a 2D Piecewise Linear Map

Radi, Davide
Secondo
;
Sushko, Iryna
Penultimo
;
2022

Abstract

We develop a simple financial market model in which a market maker adjusts the price with respect to orders placed by chartists and fundamentalists. A novel feature of our model is that fundamentalists optimistically (pessimistically) believe in a relatively high (low) fundamental value when the financial market is increasing (decreasing). As it turns out, the dynamics of our model is driven by a two-dimensional discontinuous piecewise linear map for which we provide an in-depth analytical and numerical investigation. Among other things, we obtain in explicit form the boundaries of the periodicity regions associated with attracting cycles with rotation number 1/n, n \geq 3. These boundaries correspond to border collision bifurcations of the related cycles. We show that the periodicity regions are organized in a specific period adding structure, and some of the regions may overlap. Several examples of coexisting cycles and their basins of attraction are also presented. Economically, our results offer a new explanation for the boom-bust behavior of actual financial markets.
2022
Inglese
Gardini, L., Radi, D., Schmitt, N., Sushko, I., Westerhoff, F., Perception of Fundamental Values and Financial Market Dynamics: Mathematical Insights from a 2D Piecewise Linear Map, <<SIAM JOURNAL ON APPLIED DYNAMICAL SYSTEMS>>, 2022; 21 (4): 2314-2337. [doi:10.1137/21M1456339] [https://hdl.handle.net/10807/224968]
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/10807/224968
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