THE SOCIOECONOMIC DYNAMICS OF SPECULATIVE MARKETS - INTERACTING AGENTS, CHAOS, AND THE FAT TAILS OF RETURN DISTRIBUTIONS

This paper develops a model of the social and economic interaction of speculators in a securities or foreign exchange market. Both chartist and fundamentalist strategies are pursued by traders. The formalizatio n of chartists behavior combines elements of mimetic contagion and tre nd chasing leading to waves of optimism or pessimism. Furthermore, cha nges of strategies from chartist to fundamentalist behavior and vice v ersa occur because speculators compare the performance of both strateg ies. The dynamic system under study encompasses the time development o f the distribution of attitudes among traders as well as price adjustm ent. Chaotic attractors are found within a broad range of parameter va lues. The distributions of returns derived from chaotic trajectories o f the model share important characteristics of empirical data: they ex hibit high peaks around the mean as well as fat tails (leptokurtosis) and become less leptokurtotic under time aggregation. (C) 1998 Elsevie r Science B.V.