Limitations of Stabilizing Effects of Fundamentalists Facing Positive Feedback Traders

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Baumann, Michael Heinrich ; Baumann, Michaela ; Erler, Alexander:
Limitations of Stabilizing Effects of Fundamentalists Facing Positive Feedback Traders.
Bayreuth , 2016 . - 24 S.

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Abstract

We analyze financial interactions between fundamentalists and chartists within a heterogeneous agent model, focusing on discovering whether the presence of fundamentalists is enough to stabilize prices. In contrast to related work, which is based on simulations, we analytically prove that the presence of fundamentalists is not sufficient to avoid asset price bubbles. The behavior of trend followers can result in exploding prices irrespective of fundamentalists' investment decisions. We derive the upper boundaries for positive feedback traders' investments necessary to avoid exploding prices. In this situation, intervention measures might be necessary in order to stabilize stock/asset markets.