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A multi-market model with heterogeneous agents and switching mechanism
Serena Brianzoni1, Giovanni Campisi1
1Department of Management, Polytechnic University of Marche, Piazzale Martelli 8, 60121 Ancona, Italy.
Chaos (Woodbury, N.Y.)
|August 1, 2025
Summary
This study reveals how investor beliefs and trading strategies in financial markets can cause significant price fluctuations and market instability. Understanding these dynamics is key to managing investment uncertainty.
Area of Science:
- Quantitative Finance
- Behavioral Finance
- Market Microstructure
Background:
- Financial markets feature diverse traders with distinct strategies.
- Market makers play a crucial role in price discovery.
- Investor behavior significantly impacts market dynamics.
Purpose of the Study:
- To develop a multi-market model analyzing trader interactions.
- To investigate the impact of investor beliefs on asset dynamics.
- To identify conditions leading to market instability and complex price behavior.
Main Methods:
- Developed a two-market model with fundamentalist and momentum traders.
- Employed a nonlinear market maker price adjustment mechanism.
- Utilized bifurcation analysis to determine stability conditions.
Main Results:
- Relative influence of traders' beliefs can cause large-amplitude price fluctuations.
- Investor preferences and switching mechanisms can destabilize markets.
- Polarized beliefs introduce significant uncertainty and complex price dynamics.
Conclusions:
- Investor behavior and belief structures are critical drivers of market stability.
- The model provides analytical conditions for market destabilization.
- Understanding these factors is essential for predicting and managing financial market volatility.
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