A prototype model of speculative dynamics with position-based trading

Reiner Franke

Journal of Economic Dynamics and Control, 2009, vol. 33, issue 5, pages 1134-1158

Abstract: The paper extracts a prototype asset pricing model from the literature where a market maker adjusts prices in response to order imbalances and the strategies of fundamentalists and chartists are position-based, that is, the two groups are specified in terms of their desired holdings. The deterministic formulation of the model leads to a neutral delay-differential equation of the price, whose mathematical analysis is non-standard and may be of independent interest. The stability conditions are nevertheless quite analogous to the order-based Beja-Goldman model. The effects of parameter variations are also studied in a stochastic setting, where special emphasis is put on the misalignment between price and the time-varying fundamental value, the market maker's risk aversion, and the differential profits of fundamentalists and chartists.

Keywords: Asset; pricing; Market; maker; risk; aversion; Misalignment; Neutral; delay-differential; equation (search for similar items in EconPapers)
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:eee:dyncon:v:33:y:2009:i:5:p:1134-1158

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