Analysis of a Heterogeneous Trader Model for Asset Price Dynamics

Abstract

We examine an asset pricing model of Westerhoff (2005). The model incorporates heterogeneous beliefs among traders, specifically fundamentalists and trend-chasing chartists. The form of the model is shown here to be a nonlinear planar map. Since it contains a single parameter, the model may be considered the simplest effective model yet derived for financial asset pricing with heterogeneous trading. Analysis of the map yields results for stability and bifurcations of fixed points and periodic orbits. The model has intricate attractor basin behavior and global bifurcations to chaos: symmetric homoclinic bifurcation and boundary crisis.