Delay, feedback and quenching in financial markets |
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Authors: | PS Grassia |
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Institution: | (1) Department of Chemical Engineering, UMIST, PO Box 88, Manchester M60 1QD, UK, GB |
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Abstract: | An asset whose price exhibits geometric Brownian motion is analysed. The basic Brownian motion model is modified to account
for the effects of market delay and investor feedback. A Langevin equation model is appropriate. When the feedback coupling
is sufficiently strong, the market dynamics switches from a slow random walk behaviour to a rapid unstable behaviour with
a fast time scale characteristic of the market delay. The unstable runaway behaviour is subsequently quenched by investors
deserting a collapsing market or saturating a booming one. This quenching effect is sufficient to ensure long term bounding
of the asset price. A form of market sabotage is demonstrated in which investors can push the market from a stable to an unstable
regime.
Received 24 February 2000 |
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Keywords: | PACS 02 50 Ey Stochastic processes - 89 90 +n Other areas of general interest to physicists |
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