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Computational Economics

, Volume 32, Issue 1–2, pp 55–72 | Cite as

A Model of Financial Market Dynamics with Heterogeneous Beliefs and State-Dependent Confidence

  • Carl Chiarella
  • Roberto Dieci
  • Laura Gardini
  • Lucia Sbragia
Article

Abstract

In a simple model of financial market dynamics, we allow the price of a risky security to be set by a market maker depending on the excess demand of heterogeneous interacting traders, fundamentalists and chartists, who place their orders based upon different expectations schemes about future prices: while chartists rely on standard trend-based rules, fundamentalists are assumed to know the economic environment and to form their beliefs accordingly. As price moves away from the long-run fundamental, fundamentalists become less confident in their forecasts, and put increasing weight on a reversion towards the fundamental price. The resulting two-dimensional discrete time dynamical system can exhibit a rich range of dynamic scenarios, often characterized by coexistence of attractors. A simple noisy version of the model reveals a variety of possible patterns for return time series.

Keywords

Heterogeneous beliefs Financial market dynamics Bifurcation analysis Coexisting attractors 

JEL Classifications

C62 D84 E32 G12 

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Copyright information

© Springer Science+Business Media, LLC. 2008

Authors and Affiliations

  • Carl Chiarella
    • 1
  • Roberto Dieci
    • 2
  • Laura Gardini
    • 3
  • Lucia Sbragia
    • 3
  1. 1.School of Finance and EconomicsUniversity of Technology SydneySydneyAustralia
  2. 2.Department of Mathematics for Economic and Social SciencesUniversity of BolognaBolognaItaly
  3. 3.Institute of EconomicsUniversity of UrbinoUrbinoItaly

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