Contagion effects in a chartist–fundamentalist model with time delays

Abstract

In this paper two models of speculative markets are developed to study the effects of feedback mechanisms in financial markets. In the first model, a crash market model couples a linear chartist–fundamentalist model with time delays with a log-periodic market index I(t) through direct coupling. Numerical solutions to the model show that asset prices exhibit significant persistence as a result of the coupling to the log-periodic market index. An extension to include endogenous wealth dynamics shows that the chartists benefit from the persistent dynamics induced by the coupling. The second model is a two-asset model represented by a 2-dimensional delay-differential equation. Asset one price exhibits limit cycle dynamics while in the second market asset prices follow stable damped oscillations. The markets are coupled through a diffusive coupling term. Solutions to the coupled model show that the dynamics of asset two changes fundamentally with the price now exhibiting a limit cycle. The stable converging dynamics is replaced with limit cycle oscillations around the fundamental.