Endogenous Market Turbulence
Tambakis, Demosthenes N
CFAP Working Paper
CFAP, Cambridge Judge Business School, University of Cambridge
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Tambakis, D. N. (2006). Endogenous Market Turbulence.
In this paper I study a nonlinear feedback trading model which can generate stable, unstable, turbulent or chaotic asset returns depending on market conditions. The dynamics are driven by the stochastic price impact of net order flow (inverse market liquidity). If price impact grows beyond exogenous threshold values, liquidity dries up and asset returns become turbulent. In the absence of fundamental factors, the occurrence of turbulence and chaos is entirely endogenous. The results highlight the critical role of maintaining stable market-making conditions for averting “liquidity black holes”.
feedback trading, stochastic price impact, financial stability, chaos, nonlinear dynamics
This record's URL: http://www.dspace.cam.ac.uk/handle/1810/225153