Heterogeneous fundamentalists and market maker inventories. (October 2015)

• Record Type: Journal Article
• Authors: Carraro, Alessandro; Ricchiuti, Giorgio
• Is Part Of: Chaos, solitons and fractals. Volume 79(2015)
• Page Start: 73
• Page End: 82
• Publication Date: 2015-10
• Subjects: Chaotic behavior in systems -- Periodicals; Solitons -- Periodicals; Fractals -- Periodicals; Chaotic behavior in systems; Fractals; Solitons; Periodicals; 003.7
• DOI: 10.1016/j.chaos.2015.05.031
• Languages: English
• ISSNs: 0960-0779

Abstract

Abstract: In this paper, we develop a heterogeneous agents model of asset price and inventory with a market maker who considers the excess demand of two groups of agents that employ the same trading rule (i.e. fundamentalists) with different beliefs on the fundamental value. The dynamics of our model is driven by a bi-dimensional discrete non-linear map. We show that the market maker has a destabilizing role when she actively manages the inventory. Moreover, inventory share and the distance between agents' beliefs strongly influence the results: market instability and periodic, or even, chaotic price fluctuations can be generated. Finally, we show through simulations that endogenous fluctuations of the fractions of agents may trigger instability for a larger set of parameters.