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

The behavior of different types of investors plays an important role in determining asset price fluctuations. We analyze financial interactions between fundamentalists and chartists within a heterogeneous agent model. In particular, we ask 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 might lead to exploding price processes irrespective of fundamentalists' investment decisions. Upper boundaries for positive feedback traders' investments are derived which are necessary to avoid exploding prices. In this situation, intervention measures might be necessary in order to stabilize stock/asset markets.