Market Oscillations Induced by the Competition between Value-Based and Trend-Based Investment Strategies

37 Pages Posted: 18 Feb 2005

See all articles by Gunduz Caginalp

Gunduz Caginalp

University of Pittsburgh - Department of Mathematics

Donald Balevonich

Indiana University of Pennsylvania

Abstract

We consider financial market using mathematical models which incorporate an excess demand function that depends not only upon the price but on the price derivative. The classical (value-based) motivation for purchasing the equity is augmented with a trend-based strategy of buying due to rising prices. An analysis (based on money flow and the finiteness of assets) of the supply, demand and price as a function of time leads to a system of ordinary differential equations which is mathematically complete. The numerical study of our equations exhibits overshooting, abrupt reversals and oscillations in prices. We examine our models with the context of real markets and economic laboratory experiments by comparing its predictions with a set of Porter and Smith experiments and with all US stock market crashes since 1929.

Suggested Citation

Caginalp, Gunduz and Balevonich, Donald, Market Oscillations Induced by the Competition between Value-Based and Trend-Based Investment Strategies. Available at SSRN: https://ssrn.com/abstract=668461

Gunduz Caginalp (Contact Author)

University of Pittsburgh - Department of Mathematics ( email )

507 Thackeray Hall
Pittsburgh, PA 15260
United States
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412-624-8397 (Fax)

Donald Balevonich

Indiana University of Pennsylvania ( email )

Indiana, PA 15705

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