Modeling stock market dynamics based on conservation principles

Jose Alvarez-Ramirez and Carlos Ibarra-Valdez

Physica A: Statistical Mechanics and its Applications, 2001, vol. 301, issue 1, 493-511

Abstract: In this paper, a deterministic framework for modeling stock market dynamics is presented. The model is based on assets conservation principles and consists of a series of differential equations describing the dynamics of assets trading, and a (nonlinear) functional equation describing trade conservation (i.e., what is bought (sold) by one trader is sold (bought) by other traders). In this way, the dynamics of the assets and its price are determined by the trading dynamics. An equilibrium price is achieved when certain demand/supply equations are satisfied. Attention is devoted to a specific case, in which the trading activity is based on trader groups and an infinitely divisible asset. Numerical simulations show that even a single stock market asset with two classes of investors can display oscillatory price dynamics and instability. Moreover, the underlying oscillatory time-series display a discontinuous erratic-type behavior.

Keywords: Econophysics; Stock market; Trading; Price dynamics; Oscillations (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:301:y:2001:i:1:p:493-511

DOI: 10.1016/S0378-4371(01)00410-1

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