An analysis of the effect of noise in a heterogeneous agent financial market model

Carl Chiarella, Xuezhong (Tony) He () and Min Zheng

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 1, 148-162

Abstract: Heterogeneous agent models (HAMs) in finance and economics are often characterised by high dimensional nonlinear stochastic differential or difference systems. Because of the complexity of the interaction between the nonlinearities and noise, a commonly used, often called indirect, approach to the study of HAMs combines theoretical analysis of the underlying deterministic skeleton with numerical analysis of the stochastic model. However, it is well known that this indirect approach may not properly characterise the nature of the stochastic model. This paper aims to tackle this issue by developing a direct and analytical approach to the analysis of a stochastic model of speculative price dynamics involving two types of agents, fundamentalists and chartists, and the market price equilibria of which can be characterised by the stationary measures of a stochastic dynamical system. Using the stochastic method of averaging and stochastic bifurcation theory, we show that the stochastic model displays behaviour consistent with that of the underlying deterministic model when the time lag in the formation of price trends used by the chartists is far away from zero. However, when this lag approaches zero, such consistency breaks down.

Keywords: Heterogeneous; agents; Speculative; behaviour; Stochastic; bifurcations; Stationary; measures; Chartists (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:1:p:148-162

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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