Limitations of stabilizing effects of fundamentalists: Facing positive feedback traders
Michael Heinrich Baumann,
Michaela Baumann and
Alexander Erler
Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), 2019, vol. 13, No 2019-44, 26 pages
Abstract:
The authors analyze financial interactions between chartists with bounded leverage and fundamentalists within a heterogeneous agent model, focusing on the role of fundamentalists to stabilize prices. While many related studies are solely based on simulations, the authors analytically prove that the existence of fundamentalists is insufficient to avoid asset price bubbles for a certain setup of a feedback trader model. Moreover, similar studies very often face the criticism that chartists might run out of money before the emergence of bubbles, as these studies typically analyze the role of chartists with unbounded leverage. In the work at hand, however, the authors prove that even in an environment where chartists have limited access to finance, their investment behavior can lead to exploding prices. The chartists under study are so-called positive feedback traders, whose leverage is bounded. Additionally, the authors derive upper boundaries for positive feedback traders' initial investment necessary to avoid exploding prices. In order to stabilize stock/asset markets, intervention measures might be helpful.
Keywords: heterogeneous agents; feedback trading; fundamentalists; chartists; trend followers; financial bubbles; financial crisis (search for similar items in EconPapers)
JEL-codes: D84 G01 G11 (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)
Downloads: (external link)
http://dx.doi.org/10.5018/economics-ejournal.ja.2019-44
https://www.econstor.eu/bitstream/10419/206400/1/1681379279.pdf (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:zbw:ifweej:201944
DOI: 10.5018/economics-ejournal.ja.2019-44
Access Statistics for this article
Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) is currently edited by Dennis J. Snower
More articles in Economics - The Open-Access, Open-Assessment E-Journal (2007-2020) from Kiel Institute for the World Economy (IfW Kiel) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics (econstor@zbw-workspace.eu).