Trend followers, contrarians and fundamentalists: Explaining the dynamics of financial markets
Year: 2021
Type: article
Abstract: We propose an empirically motivated financial market model in which speculators rely on trend-following, contrarian and fundamental trading rules to determine their orders. Speculators’ probabilistic rule-selection behavior – the only type of intrinsic randomness in our model – depends on past and current performance indicators. Our model replicates a number of important stylized facts of financial markets, most noteworthy their approximate random walk price behavior. For a large number of speculators, the model’s intrinsic randomness vanishes and its dynamics is driven by an analytically tractable nonlinear map. An in-depth investigation into this map provides the key to understanding how the model functions.
Authors: Noemi Schmitt, Frank Westerhoff
Institution: University of Bamberg
Language: English
Subfield: Economics and Econometrics
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2962097553