Trader Behavior and its Effect on Asset Price Dynamics

James Primbs and Muruhan Rathinam

Applied Mathematical Finance, 2009, vol. 16, issue 2, 151-181

Abstract: In this paper, we present a natural mathematical framework to model trader behavior as a continuous time discrete event process, and derive stochastic differential equations for aggregate behavior and price dynamics by passing to diffusion limits. In particular, we model extraneous, value, momentum and hedge traders. Through analysis and numerical simulation we explore some of the effects these trading strategies have on price dynamics.

Keywords: Trader behavior; price dynamics; stock pinning; diffusion limit; Poisson random measure (search for similar items in EconPapers)
Date: 2009
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DOI: 10.1080/13504860802583444

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