The Transition from Brownian Motion to Boom-and-Bust Dynamics in Financial and Economic Systems

Harbir Lamba

Papers from arXiv.org

Abstract: Quasi-equilibrium models for aggregate variables are widely-used throughout finance and economics. The validity of such models depends crucially upon assuming that the systems' participants behave both independently and in a Markovian fashion. We present a simplified market model to demonstrate that herding effects between agents can cause a transition to boom-and-bust dynamics at realistic parameter values. The model can also be viewed as a novel stochastic particle system with switching and reinjection.

Date: 2012-09
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1209.4629

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