Asset Price Dynamics in a Financial Market with Heterogeneous Trading Strategies and Time Delays

Universita Degli Studi di Roma 'La Sapienza' Public Economics Working Paper No. 88

23 Pages Posted: 3 Nov 2005

See all articles by Giuseppe Garofalo

Giuseppe Garofalo

Department of Economics and Management; Department of Economics and Law

Alessandro Sansone

Dipartimento di Scienze Economiche (DiSSE); University of Technology Sydney (UTS) - School of Finance and Economics

Date Written: October 2005

Abstract

In this paper we present a continuous time dynamical model of heterogeneous agents interacting in a financial market where transactions are cleared by a market maker. The market is composed of fundamentalist, trend following and contrarian agents who process information from the market with different time delays. Each class of investor is characterized by path dependent risk aversion. We also allow for the possibility of evolutionary switching between trend following and contrarian strategies. We find that the system shows periodic, quasi-periodic and chaotic dynamics as well as synchronization between technical traders. Furthermore, the model is able to generate time series of returns that exhibit statistical properties similar to those of the S&P500 index, which is characterized by excess kurtosis, volatility clustering and long memory.

Keywords: Dynamic asset pricing, Heterogeneous agents, Complex dynamics, Strange attractors, Chaos, Intermittency, Stock market dynamics, Synchronization

JEL Classification: G11, G12, G14

Suggested Citation

Garofalo, Giuseppe and Sansone, Alessandro, Asset Price Dynamics in a Financial Market with Heterogeneous Trading Strategies and Time Delays (October 2005). Universita Degli Studi di Roma 'La Sapienza' Public Economics Working Paper No. 88, Available at SSRN: https://ssrn.com/abstract=804124 or http://dx.doi.org/10.2139/ssrn.804124

Giuseppe Garofalo

Department of Economics and Management ( email )

Viterbo, 01100
Italy
+390761357739 (Phone)

HOME PAGE: http://www.unitus.it/dipartimenti/distateq/garofalo/index.html

Department of Economics and Law ( email )

Via del Castro Laurenziano 9
Rome, 00161
Italy

HOME PAGE: http://151.100.23.90/serale2/docenti/principale_somm2.asp

Alessandro Sansone (Contact Author)

Dipartimento di Scienze Economiche (DiSSE) ( email )

14 Via Cesalpino
Rome, 00161
Italy

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia

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