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Journal of Economic Interaction and Coordination

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09-01-2020 | Regular Article

Investment behaviour and “bull & bear” dynamics: modelling real and stock market interactions

Authors: Serena Sordi, Marwil J. Dávila-Fernández

Published in: Journal of Economic Interaction and Coordination | Issue 4/2020

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Abstract

In this article, we develop a simple behavioural macrodynamic model in continuous-time with the purpose of investigating the interaction of the real economy and the financial markets. Building on Westerhoff (Discret Dyn Nat Soc, 2012), we improve the specification of aggregate demand by distinguishing between consumption and investment expenditure and assuming that the latter is determined by the flexible accelerator principle. We remove the ad hoc nonlinearity in the fundamentalist behavioural rule and allow the composition of the population between chartists and fundamentalists to be endogenously determined. The resulting nonlinear dynamic systems are shown to generate various dynamic regimes, among which the coexistence of periodic attractors with interesting economic implications. Endogenous investment and stock market dynamics emerge, procyclical to each other, reflecting the interaction of induced investment with alternating waves in speculators’ sentiments. We show that a strong investment accelerator might be a crucial force generating fluctuations that, on the one hand, are transmitted and amplified by chartists and, on the other hand, are contained by fundamentalists.

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The figure clearly shows that the stable manifold of the saddle point \(E_{1}\) separates the basins of attraction of the two external equilibrium points. In this figure, as in all other which follow, the attractive equilibrium points are marked by full dots (\({\bullet }\)), the repulsive equilibrium points by open dots (\({\circ }\)) and saddle points by squares (\({\tiny \square }\)).

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Title: Investment behaviour and “bull & bear” dynamics: modelling real and stock market interactions
Authors: Serena Sordi
Marwil J. Dávila-Fernández
Publication date: 09-01-2020
Publisher: Springer Berlin Heidelberg
Published in: Journal of Economic Interaction and Coordination / Issue 4/2020
Print ISSN: 1860-711X
Electronic ISSN: 1860-7128
DOI: https://doi.org/10.1007/s11403-019-00279-w

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