Dynamic behavior of real and stock markets with a varying degree of interaction

Ahmad Naimzada and Marina Pireddu

No 245, Working Papers from University of Milano-Bicocca, Department of Economics

Abstract: We develop a macroeconomic behavioral model in order to analyze the interactions between real and financial markets. The real subsystem is represented by a simple Keynesian income-expenditure model, while the financial subsystem is represented by an equilibrium stock market with heterogeneous speculators, i.e., chartists and fundamentalists. The interactions between the two markets are modeled in the following way: the aggregate demand depends, among other variables, also on the stock market price, while the fundamental value used by speculators in their decisional process depends on real economic conditions. In our model we introduce a parameter that represents the degree of interaction. With the aid of analytical and numerical tools we show that an increasing degree of interaction between markets tends to locally stabilize the system. This stabilization occurs via a sequence of period-halving bifurcations. Globally, we find that the stabilization process implies multistability, i.e., the coexistence of different kinds of attractors.

Keywords: Interacting markets; bifurcation; stabilization; complex dynamics; multistability (search for similar items in EconPapers)
JEL-codes: D84 E12 E32 G02 G12 (search for similar items in EconPapers)
Pages: 18
Date: 2013-06, Revised 2013-06
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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