The stochastic bifurcation behaviour of speculative financial markets

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

Physica A: Statistical Mechanics and its Applications, 2008, vol. 387, issue 15, 3837-3846

Abstract: This paper establishes a continuous-time stochastic asset pricing model in a speculative financial market with fundamentalists and chartists by introducing a noisy fundamental price. By application of stochastic bifurcation theory, the limiting market equilibrium distribution is examined numerically. It is shown that speculative behaviour of chartists can cause the market price to display different forms of equilibrium distributions. In particular, when chartists are less active, there is a unique equilibrium distribution which is stable. However, when the chartists become more active, a new equilibrium distribution will be generated and become stable. The corresponding stationary density will change from a single peak to a crater-like density. The change of stationary distribution is characterized by a bimodal logarithm price distribution and fat tails. The paper demonstrates that stochastic bifurcation theory is a useful tool in providing insight into various types of financial market behaviour in a stochastic environment.

Keywords: Heterogeneous agents; Speculative behaviour; Random dynamical systems; Stochastic bifurcations; Invariant measures (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (17)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:387:y:2008:i:15:p:3837-3846

DOI: 10.1016/j.physa.2008.01.078

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