Time-Varying Economic Dominance Through Bistable Dynamics

37 Pages Posted: 29 Jan 2018

See all articles by Xuezhong He

Xuezhong He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School; Financial Research Network (FIRN)

Kai Li

Macquarie Business School, Macquarie University

Chuncheng Wang

Harbin Institute of Technology

Date Written: January 22, 2018

Abstract

By developing a continuous-time heterogeneous agent model of multi-assets traded by fundamental and momentum investors, we provide a potential mechanism in generating time-varying dominance between fundamental and non-fundamental in financial market. The deterministic skeleton of the nonlinear model tends to have bistable dynamics, characterized by a Bautin bifurcation, in which a locally stable fundamental steady state coexists with a locally stable limit cycle around the fundamental, leading to two very different market states. Market prices switch stochastically between the two persistent market states, leading to the coexistence of seemingly controversial efficient market and price momentum over different time periods. The model also generates other financial market stylized facts, such as spillover effects in both momentum and volatility, market booms, crashes, and correlation reduction due to cross-sectional momentum trading. Empirical evidence based on US market supports the main findings.

Keywords: Heterogeneous Beliefs, Co-movement, Stability, Global Dynamics, Spillover Effect, Correlations

JEL Classification: G12, G14, E32

Suggested Citation

He, Xue-Zhong 'Tony' and Li, Kai and Wang, Chuncheng, Time-Varying Economic Dominance Through Bistable Dynamics (January 22, 2018). Available at SSRN: https://ssrn.com/abstract=3106447 or http://dx.doi.org/10.2139/ssrn.3106447

Xue-Zhong 'Tony' He

University of Technology Sydney (UTS) - Finance Discipline Group, Business School ( email )

Haymarket
Sydney, NSW 2007
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Kai Li (Contact Author)

Macquarie Business School, Macquarie University ( email )

Level 6 4 Eastern Road, Macquarie University
North Ryde NSW 2109
Sydney, NSW 99999
Australia
435473800 (Phone)

Chuncheng Wang

Harbin Institute of Technology ( email )

92 West Dazhi Street
Nan Gang District
Harbin, heilongjiang 150001
China

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