Delay, feedback and quenching in financial markets

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14 Citations (Scopus)

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.
Original languageEnglish
Pages (from-to)347-362
Number of pages16
JournalEuropean Physical Journal B - Condensed Matter and Complex Systems
Volume17
Issue number2
DOIs
Publication statusPublished - 1 Sep 2000

Keywords

  • stochastic process
  • geometric Brownian motion
  • market delay

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