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A prototype model of speculative dynamics with position-based trading

By Reiner Franke


To avoid the indeterminate and generally unbounded positions of the agents in financial market models with order-based trading, the paper considers the alternative of position-based strategies. To this end it extracts a prototype model from the literature, with fundamentalists, chartists, and a risk-averse market maker. The deterministic formulation of the model leads to a neutral delay differential equation of the price, whose mathematical analysis is non-standard. The stability conditions are nevertheless quite analogous to the order-based Beja–Goldman model. The effects of parameter variations are also studied in a stochastic setting, where special emphasis is put on the misalignment between price and the time-varying fundamental value, and on the differential profits of fundamentalists and chartists

Topics: HB, QA
Publisher: Warwick Business School, Financial Econometrics Research Centre
Year: 2007
OAI identifier:

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