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Speculative behavior and asset price dynamics.

Frank Westerhoff1

  • 1Department of Economics, University of Osnabrueck, Osnabrueck, Germany. fwesterho@oec.uni-osnabrueck.de

Nonlinear Dynamics, Psychology, and Life Sciences
|July 24, 2003
PubMed
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This study presents a speculative trading model where traders use technical or fundamental analysis. The model explains market phenomena like excess volatility and high trading volumes.

Area of Science:

  • Quantitative Finance
  • Computational Economics
  • Market Microstructure

Background:

  • Speculative trading significantly influences asset price dynamics.
  • Existing models often fail to capture complex market behaviors.
  • Understanding trader decision-making is crucial for realistic financial modeling.

Purpose of the Study:

  • To develop a nonlinear deterministic asset pricing model for speculative trading.
  • To investigate the emergent dynamics from the interaction of different trading strategies.
  • To replicate stylized facts observed in financial markets.

Main Methods:

  • Development of a nonlinear deterministic agent-based model.
  • Simulation of traders' choices between technical and fundamental analysis.

Related Experiment Videos

  • Empirical guidance from observed market behavior.

    • Main Results:

    • The model generates complex, nonlinear dynamics.
    • Endogenous replication of excess volatility and high trading volumes.
    • Successful reproduction of asset price level shifts and volatility clustering.

    Conclusions:

    • The interplay of trading rules can explain key market stylized facts.
    • Deterministic models can capture seemingly random market behavior.
    • The developed model offers insights into speculative trading dynamics.