Discrete Dynamics in Nature and Society
Volume 2005 (2005), Issue 1, Pages 19-29
doi:10.1155/DDNS.2005.19
Heterogeneous traders, price-volume signals, and complex asset price dynamics
Department of Economics, University of Osnabrueck, Rolandstrasse 8, Osnabrueck 49069, Germany
Received 21 June 2004
Copyright © 2005 Frank H. Westerhoff. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Abstract
We seek to develop a novel asset pricing model with heterogeneous traders. Fundamental traders expect that asset prices converge towards their
intrinsic values, whereas chart traders rely on both price and volume signals to determine their orders. To be precise, the larger the trading volume, the more they believe in the persistence of the current price trend. Simulations of our nonlinear deterministic
model reveal that interactions between fundamentalists and chartists may cause intricate endogenous price fluctuations. Contrary to the intuition, we find that chart trading may increase market stability.