On the Complicated Price Dynamics of Simple One- and Two-Dimensional Discontinuous Financial Markets with Heterogeneous Interacting Traders
speaker: Fabio Tramontana (Università Politecnica delle Marche)abstract: We develop a couple of financial market models with heterogeneous interacting agents. In the first one market makers adjust prices with respect to excess demand, chartists believe in the persistence of bull and bear markets and fundamentalists bet on mean reversion. As is clear from questionnaire studies (summarized by Menkoff and Taylor 2007), market participants in fact, rely on both technical and fundamental trading rules to determine the course of the market. Technical analysis is a trading method that seeks to identify trading signals out of past price movements (Murphy 1999). As a result, technicians, also called chartists, may have a destabilizing impact on the dynamics of financial markets. Fundamental analysis presumes that prices will mean-revert toward fundamental values (Graham and Dodd 1951), inducing, in general, some kind of market stability. Similar insights are obtained from laboratory experiments in which human subjects trade in a controlled financial market environment (Smith et al. 1988, Hommes et al. 2005). In our model we generalize these two building blocks, which are standard in the literature, introducing five different types of agents. First, speculators react asymmetrically in bull and bear markets. Here is an example: fundamentalists may trade more (less) aggressive if an asset is 10 percent overvalued than when it is 10 percent undervalued. Second, some speculators determine the size of their orders using linear trading rules. However, other speculators simply hold the size of their orders constant (they always trade the same amount of assets) and only determine the direction of trade with their pertinent trading philosophy. Hence, there are two types of technical and two types of fundamental traders. Finally, a market maker, the fifth type of agent, adjusts prices with respect to excess demand in the usual way. In the second model chartists do not have knowledge about the fundamental price, they only use the price trend information. Moreover we assume that chartists take position only if the difference between short and long term trend is big enough (i.e. they are reluctant when the trading signals are not strong enough).
timetable:
Fri 2 Oct, 15:45 - 16:30, Aula 3
documents:
tramontana
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