Heterogeneous Fundamentalists and Market Maker Inventories

Alessandro Carraro and Giorgio Ricchiuti

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: In this paper we develop an heterogenous agents model of asset price and inventory with a market maker who considers the excess demand of two groups of agents that employ the same trading rule (i.e. fundamentalists) with different beliefs on the fundamental value. The dynamics of our model is driven by a bi-dimensional discrete non-linear map. We show that the market maker has a destabilizing role when she actively manages the inventory. Moreover, inventory share and the distance between agents' beliefs strongly influence the results: market instability and periodic, or even, chaotic price fluctuations can be generated. Finally, we show through simulations that endogenous fluctuations of the fractions of agents may trigger to instability for a larger set of the parameters.

Keywords: heterogeneous agents models; market maker inventory; chaos (search for similar items in EconPapers)
JEL-codes: C61 C63 D84 G12 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2014
New Economics Papers: this item is included in nep-ger and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Journal Article: Heterogeneous fundamentalists and market maker inventories (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:frz:wpaper:wp2014_16.rdf

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