Limitations of stabilizing effects of fundamentalists: Facing positive feedback traders

Arbeitspapier

The authors analyze financial interactions between fundamentalists and chartists within a heterogeneous agent model, focusing on the role of fundamentalists stabilizing prices. In contrast to related studies, which are based on simulations and calculations, they analytically prove that the presence of fundamentalists is not sufficient to avoid asset price bubbles. The behavior of trend followers with bounded leverage can result in exploding prices irrespective of fundamentalists' investment decisions. They derive upper boundaries for positive feedback traders' initial investment necessary to avoid exploding prices. In order to stabilize stock/asset markets, intervention measures might be helpful.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Economics Discussion Papers ; No. 2019-3

Classification and Topics

• Classification: Wirtschaft ; Expectations; Speculations ; Financial Crises ; Portfolio Choice; Investment Decisions
• Subject: heterogeneous agents ; feedback trading ; fundamentalists ; chartists ; trend followers ; financial bubbles ; financial crisis

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Baumann, Michael Heinrich ; Baumann, Michaela ; Erler, Alexander
• Event: Veröffentlichung
• (who): Kiel Institute for the World Economy (IfW)
• (where): Kiel
• (when): 2019

Further information

• Handle: http://hdl.handle.net/10419/191896
• Last update: 10.03.2025, 11:43 AM CET