Market oscillations induced by the competition between value-based and trend-based investment strategies

G. Caginalp and D. Balenovich

Applied Mathematical Finance, 1994, vol. 1, issue 2, 129-164

Abstract: We consider financial market using mathematical models which incorporate an excess demand function that depends not only upon the price but on the price derivative. The classical (value-based) motivation for purchasing the equity is augmented with a trend-based strategy of buying due to rising prices. An analysis (based on money flow and the finiteness of assets) of the supply, demand and price as a function of time leads to a system of ordinary differential equations which is mathematically complete. The numerical study of our equations exhibits overshooting, abrupt reversals and oscillations in prices. We examine our models within the context of real markets and economic laboratory experiments by comparing its predictions with a set of Porter and Smith experiments and with all US stock market “crashes” since 1929.

Keywords: market oscillations; trend-based trading strategies (search for similar items in EconPapers)
Date: 1994
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Citations: View citations in EconPapers (5)

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DOI: 10.1080/13504869400000009

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