Discussion Paper

No. 2019-3 | January 07, 2019
Limitations of stabilizing effects of fundamentalists: facing positive feedback traders

Abstract

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.

JEL Classification:

D84, G01, G11

Assessment

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Links

Cite As

Michael Heinrich Baumann, Michaela Baumann, and Alexander Erler (2019). Limitations of stabilizing effects of fundamentalists: facing positive feedback traders. Economics Discussion Papers, No 2019-3, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2019-3


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