A financial market model with endogenous fundamental values through imitative behavior

Area of Science:

• Financial economics
• Behavioral finance
• Complex systems

Background:

• Traditional financial models often assume rational agents, overlooking psychological factors.
• Ambiguity in stock markets leads speculators to rely on imitative processes for fundamental value estimation.
• Existing models face divergence issues due to simplistic price determination mechanisms.

Purpose of the Study:

• To propose a novel financial market model incorporating heterogeneous speculators (optimistic and pessimistic).
• To analyze the impact of an imitative belief-formation process on market dynamics.
• To investigate complex behaviors and multistability arising from a nonlinear price determination mechanism.

Main Methods:

• Analytical and numerical tools to study model stability and bifurcations.
• Development of a nonlinear mechanism for stock price determination to avoid divergence.
• Simulation of agent behavior based on relative profits and imitative learning.

Main Results:

• The unique steady state's stability and bifurcations were analyzed.
• Emergence of complex behaviors, including chaotic dynamics, was observed.
• Multistability phenomena, with coexisting attractors, were identified, indicating diverse market states.

Conclusions:

• The proposed model captures complex financial market dynamics driven by heterogeneous expectations and imitative behavior.
• The nonlinear pricing mechanism effectively prevents divergence issues common in simpler models.
• The findings highlight the potential for rich, unpredictable market behavior and multiple stable market conditions.