A Mathematical Model of Financial Bubbles: A Behavioral Approach

Andrei Afilipoaei and Gustavo Carrero ()
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Andrei Afilipoaei: Department of Mathematical and Statistical Sciences, University of Alberta, Edmonton, AB T6G 2G1, Canada
Gustavo Carrero: Centre for Science, Faculty of Science and Technology, Athabasca University, Athabasca, AB T9S 3A3, Canada

Mathematics, 2023, vol. 11, issue 19, 1-17

Abstract: In this work, we propose a mathematical model to describe the price trends of unsustainable growth, abrupt collapse, and eventual stabilization characteristic of financial bubbles. The proposed model uses a set of ordinary differential equations to depict the role played by social contagion and herd behavior in the formation of financial bubbles from a behavioral standpoint, in which the market population is divided into neutral, bull (optimistic), bear (pessimistic), and quitter subgroups. The market demand is taken to be a function of both price and bull population, and the market supply is taken to be a function of both price and bear population. In such a manner, the spread of optimism and pessimism controls the supply and demand dynamics of the market and offers a dynamical characterization of the asset price behavior of a financial bubble.

Keywords: asset bubbles; financial bubbles; tulipmania; behavioral economics; herd behavior; social contagion; financial bubble model (search for similar items in EconPapers)
JEL-codes: C (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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