A dynamical systems model of price bubbles and cyclesVinod Cheriyan and Anton J. Kleywegt Quantitative Finance, 2016, vol. 16, issue 2, 309-336 Abstract: Various markets exhibit growth and collapse in prices that are sometimes called bubbles, and cycles if the phenomenon repeats. Rational expectations models have been proposed to explain these phenomena; however, such models suffer from a number of criticisms, including lack of experimental support. Moreover, they assume unbiased forecasts without explaining how the investors form their forecasts. In this paper, we provide a model of asset price forecasts and market prices that can be calibrated with experimental data and that can capture various behavioural characteristics of investors such as confidence and panic. We study the resulting dynamical system and show that asset price bubbles may result from seemingly reasonable forecasts and decisions of investors. The model attempts to provide insight into the qualitative connection between investors’ forecasting behaviour and the formation of bubbles and cycles. We present results on the convergence of the process to a fixed point, or to an attractor that describes a price cycle, or to long-run behaviour that seems unpredictable, and we consider where in the cycles most time is spent. Date: 2016 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:16:y:2016:i:2:p:309-336 Ordering information: This journal article can be ordered from DOI: 10.1080/14697688.2015.1119009 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.