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.
In: Economics : the Open-Access, Open-Assessment E-Journal. Bd. 2019 (7 Januar 2019) Heft Discussion paper 3 . - 28 Seiten.
ISSN 1864-6042

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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.