Uncertainty about fundamental, pessimistic and overconfident traders: a piecewise-linear maps approach

We analyze a financial market model with heterogeneous interacting agents where fundamentalists and chartists are considered. We assume that fundamentalists are homogeneous in their trading strategy but heterogeneous in their belief about the asset’s fundamental value. On the other hand, we consider that chartists, when they are optimistic become overconfident and they trade more than when they are pessimistic. Consequently, our model dynamics are driven by a one-dimensional piecewise-linear continuous map with three linear branches. We investigate the bifurcation structures in the map’s parameter space and describe the endogenous fear and greed market dynamics arising from our asset-pricing model.