Speculative dynamics and feedback trading. A nonlinear model

This paper studies a discrete time market model under heterogeneous trading. In the market there are a market maker and three groups of traders: feedback traders, fundamental traders and noise traders. We propose a nonlinear cumulative demand process driving the asset price. Through simulations we find that the asset price moves in the direction of the fundamental value only if there are enough fundamental traders. Positive feedback strategies tend to increase the volatility of the price and move away the price from his fundamental value. In this case speculative bubbles and positive serial correlation in returns are observed.