TY - JOUR
T1 - Perception of Fundamental Values and Financial Market Dynamics: Mathematical Insights from a 2D Piecewise Linear Map
AU - Gardini, Laura
AU - Radi, Davide
AU - Schmitt, Noemi
AU - Sushko, Iryna
AU - Westerhoff, Frank
PY - 2022
Y1 - 2022
N2 - We develop a simple financial market model in which a market maker adjusts the price with respect to orders placed by chartists and fundamentalists. A novel feature of our model is that fundamentalists optimistically (pessimistically) believe in a relatively high (low) fundamental value when the financial market is increasing (decreasing). As it turns out, the dynamics of our model is driven by a two-dimensional discontinuous piecewise linear map for which we provide an in-depth analytical and numerical investigation. Among other things, we obtain in explicit form the boundaries of the periodicity regions associated with attracting cycles with rotation number 1/n, n \geq 3. These boundaries correspond to border collision bifurcations of the related cycles. We show that the periodicity regions are organized in a specific period adding structure, and some of the regions may overlap. Several examples of coexisting cycles and their basins of attraction are also presented. Economically, our results offer a new explanation for the boom-bust behavior of actual financial markets.
AB - We develop a simple financial market model in which a market maker adjusts the price with respect to orders placed by chartists and fundamentalists. A novel feature of our model is that fundamentalists optimistically (pessimistically) believe in a relatively high (low) fundamental value when the financial market is increasing (decreasing). As it turns out, the dynamics of our model is driven by a two-dimensional discontinuous piecewise linear map for which we provide an in-depth analytical and numerical investigation. Among other things, we obtain in explicit form the boundaries of the periodicity regions associated with attracting cycles with rotation number 1/n, n \geq 3. These boundaries correspond to border collision bifurcations of the related cycles. We show that the periodicity regions are organized in a specific period adding structure, and some of the regions may overlap. Several examples of coexisting cycles and their basins of attraction are also presented. Economically, our results offer a new explanation for the boom-bust behavior of actual financial markets.
KW - 2D discontinuous piecewise linear map
KW - bifurcation structure
KW - boom-bust cycles
KW - border collision bifurcation
KW - financial market model
KW - 2D discontinuous piecewise linear map
KW - bifurcation structure
KW - boom-bust cycles
KW - border collision bifurcation
KW - financial market model
UR - http://hdl.handle.net/10807/224968
U2 - 10.1137/21M1456339
DO - 10.1137/21M1456339
M3 - Article
SN - 1536-0040
VL - 21
SP - 2314
EP - 2337
JO - SIAM Journal on Applied Dynamical Systems
JF - SIAM Journal on Applied Dynamical Systems
ER -