Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets

Noemi Schmitt and Frank Westerhoff

No 151, BERG Working Paper Series from Bamberg University, Bamberg Economic Research Group

Abstract: We propose an empirically motivated financial market model in which speculators rely on trend-following, contrarian and fundamental trading rules to determine their orders. Speculators' probabilistic rule-selection behavior - the only type of randomness in our model - depends on past and future performance indicators. For a large number of speculators, the model's intrinsic noise vanishes and its dynamics is driven by an analytically tractable nonlinear map. An in-depth investigation into this map provides the key to understanding how the model functions. Since our model is able to match a number of important stylized facts concerning financial markets, it may be regarded as validated.

Keywords: financial markets; stylized facts; technical and fundamental analysis; probabilistic rule-selection behavior; nonlinear dynamics; stability and bifurcation analysis (search for similar items in EconPapers)
JEL-codes: C63 D84 G15 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (9)

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Journal Article: Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bamber:151

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