Causes of fragile stock market stability

L. Gardini, D. Radi, N. Schmitt, I. Sushko and Frank Westerhoff

Journal of Economic Behavior & Organization, 2022, vol. 200, issue C, 483-498

Abstract: We develop a behavioral stock market model in which a market maker adjusts stock prices with respect to the orders of chartists, fundamentalists and sentiment traders. We analytically prove that the mere presence of sentiment traders, i.e. traders who optimistically buy stocks in rising markets and pessimistically sell stocks in falling markets, compromises the stability of stock markets. In particular, this means that instead of converging towards their fundamental value, stock prices either display endogenous oscillatory dynamics or converge towards nonfundamental fixed points – observations that challenge standard stability claims offered in the pertinent literature.

Keywords: Stock market dynamics; Boundedly rational speculators; Heterogeneous trading rules; Dynamical systems; Stability and bifurcation analysis (search for similar items in EconPapers)
JEL-codes: C62 G12 G41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:200:y:2022:i:c:p:483-498

DOI: 10.1016/j.jebo.2022.06.009

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