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Discrete Dynamics in Nature and Society
Volume 2011, Article ID 959847, 33 pages
http://dx.doi.org/10.1155/2011/959847
Research Article

Market Dynamics When Agents Anticipate Correlation Breakdown

1Department of Quantitative Methods, University of Brescia, 25121 Brescia, Italy
2Department of Quantitative Methods for Economics and Business Science, University of Milano-Bicocca, 20126 Milano, Italy

Received 19 January 2011; Revised 6 May 2011; Accepted 29 June 2011

Academic Editor: Recai Kilic

Copyright © 2011 Paolo Falbo and Rosanna Grassi. This is an open access article distributed under the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

Abstract

The aim of this paper is to analyse the effect introduced in the dynamics of a financial market when agents anticipate the occurrence of a correlation breakdown. What emerges is that correlation breakdowns can act both as a consequence and as a triggering factor in the emergence of financial crises rational bubbles. We propose a market with two kinds of agents: speculators and rational investors. Rational agents use excess demand information to estimate the variance-covariance structure of assets returns, and their investment decisions are represented as a Markowitz optimal portfolio allocation. Speculators are uninformed agents and form their expectations by imitative behavior, depending on market excess demand. Several market equilibria result, depending on the prevalence of one of the two types of agents. Differing from previous results in the literature on the interaction between market dynamics and speculative behavior, rational agents can generate financial crises, even without the speculator contribution.