Hostname: page-component-7dd5485656-2pp2p Total loading time: 0 Render date: 2025-10-29T20:16:10.304Z Has data issue: false hasContentIssue false
  • English
  • Français

THE PERIOD OF FINANCIAL DISTRESS IN SPECULATIVE MARKETS: INTERACTING HETEROGENEOUS AGENTS AND FINANCIAL CONSTRAINTS

Published online by Cambridge University Press:  11 January 2010

Mauro Gallegati ,
Antonio Palestrini  and
J. Barkley Rosser Jr.
Mauro Gallegati
Affiliation:
Università Politecnica della Marche
Antonio Palestrini
Affiliation:
University of Teramo
J. Barkley Rosser Jr.*
Affiliation:
James Madison University
*
Address correspondence to: J. Barkley Rosser, Jr., MSC 0204, James Madison University, Harrisonburg, VA 22807, USA; e-mail: rosserjb@jmu.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

We investigate how stochastic asset price dynamics with herding and financial constraints explains the presence of a period of financial distress (PFD) following the peak and preceding the crash of a bubble [Charles P. Kindleberger, Manias, Panics, and Crashes: A History of Financial Crisis, 4th ed. (New York: Wiley, 2000, Appendix B)] as common among most major historical speculative bubbles. Simulations show that the PFD is due to (1) agents' wealth distribution dynamics and (2) positive and sufficiently high transaction costs generating losses for a significant mass of the agents' distribution after the peak of the bubble. The use of transaction costs to get the result is only a modeling tool. Many other mechanisms—able to generate losses for a large mass of the agents' distribution in periods in which financial constraints bind—can produce the same result. The paper also shows how the PFD is affected by a variation of the sensitivity of price to the excess demand and by the switching strategy.

Keywords

Period of Financial DistressFinancial ConstraintsHerding Behavior

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 15 , Issue 1 , February 2011 , pp. 60 - 79
Copyright
Copyright © Cambridge University Press 2010

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Arthur, W. Brian, Holland, John H., LeBaron, Blake, Palmer, Richard, and Tayler, Paul (1997) Asset pricing under endogenous expectations in an artificial stock market. In Arthur, W. Brian, Durlauf, Steven N., and Lane, David A. (eds.), The Economy as an Evolving Complex System II, pp. 15–44. Reading, MA: Addison-Wesley.Google Scholar
Bagehot, Walter (1873) Lombard Street: A Description of the Money Market. London: Henry S. King.Google Scholar
Baumol, William J. (1957) Speculation, profitability, and stability. Review of Economics and Statistics 34, 263–271.CrossRefGoogle Scholar
Bischi, Gian-Italo, Gallegati, Mauro, Gardini, Laura, Leombrini, Roberto, and Palestrini, Antonio (2006) Herd behavior and non-fundamental asset price fluctuations in financial markets. Macroeconomic Dynamics 10, 502–528.CrossRefGoogle Scholar
Black, Fischer (1986) Noise. Journal of Finance 41, 529–543.CrossRefGoogle Scholar
Blanchard, Olivier J. and Watson, Mark W. (1982) Bubbles, rational expectations, and financial markets. In Wachtel, P. (ed.), Crises in the Economic and Financial Structure, pp. 295–315. Lexington, MA: Lexington Books.Google Scholar
Brock, William A. (1993) Pathways to randomness in the economy: Emergent nonlinearity and chaos in economics and finance. Estudios Económicos 8, 3–55.Google Scholar
Brock, William A. and Durlauf, Steven N. (2001a) Discrete choice with social interactions. Review of Economic Studies 63, 235–260.CrossRefGoogle Scholar
Brock, William A. and Durlauf, Steven N. (2001b) Interactions-based models. In Heckman, James J. and Leamer, Edward (eds.), Handbook of Econometrics, vol. 5, pp. 3297–3380. Amsterdam: Elsevier.CrossRefGoogle Scholar
Brock, William A. and Hommes, Cars H. (1997) A rational route to randomness. Econometrica 65, 1059–1095.CrossRefGoogle Scholar
Calvo, Guillermo and Mendoza, Enrique (2000) Capital-markets crises and economic collapse in emerging markets: An informational-frictions approach. American Economic Review Papers and Proceedings 90, 59–64.CrossRefGoogle Scholar
Carswell, John (1960) The South Sea Bubble. London: Cresset Press.Google Scholar
Chiarella, Carl (1992) The dynamics of speculative markets. Annals of Operations Research 37, 101–23.CrossRefGoogle Scholar
Chiarella, Carl, Dieci, Roberto, and Gardini, Laura (2001) Asset price dynamics in a financial market with fundamentalists and chartists. Discrete Dynamics in Nature and Society 6, 69–99.CrossRefGoogle Scholar
Chiarella, Carl, Gallegati, Mauro, Leombruni, Roberto, and Palestrini, Antonio (2003) Asset price dynamics among heterogeneous interacting agents. Computational Economics 22, 213–223.CrossRefGoogle Scholar
Chiarella, Carl and He, X.Z. (2002) Heterogeneous beliefs, risk and learning in a simple asset pricing model. Computational Economics 19, 95–132.CrossRefGoogle Scholar
Day, Richard H. and Huang, Weihong (1990) Bulls, bears, and market sheep. Journal of Economic Behavior and Organization 14, 299–329.CrossRefGoogle Scholar
DeLong, J. Bradford, Shleifer, Andrei, Summers, Lawrence H., and Waldmann, Robert J. (1990) Positive feedback investment strategies and destabilizing rational speculation. Journal of Finance 45, 379–395.CrossRefGoogle Scholar
DeLong, J. Bradford, Shleifer, Andrei, Summers, Lawrence H., and Waldmann, Robert J. (1991) The survival of noise traders in financial markets. Journal of Business 64, 1–19.Google Scholar
Farrell, Michael J. (1966) Profitable speculation. Economica 33, 283–293.CrossRefGoogle Scholar
Föllmer, Hans, Horst, Ulrich, and Kirman, Alan (2005) Equilibria in financial markets with heterogeneous agents: A probabilistic perspective. Journal of Mathematical Economics 41, 123–155.CrossRefGoogle Scholar
Galbraith, John Kenneth (1954) The Great Crash, 1929. Boston: Houghton Mifflin.Google Scholar
Garber, Peter M. (1989) Tulipmania. Journal of Political Economy 42, 535–560.CrossRefGoogle Scholar
Gordon, Myron J. (1971) Toward a theory of financial distress. Journal of Finance 26, 347–356.CrossRefGoogle Scholar
Hommes, Cars H. (2006) Heterogeneous agent models in economics and finance. In Tesfatsion, Leigh and Judd, Kenneth L. (eds.), Handbook of Computational Economics, vol. 2: Agent-Based Computational Economics, pp. 1109–1186. Amsterdam: North-Holland.Google Scholar
Hong, Harrison and Stein, Jerome (2003) Differences of opinion, short-sales constraints and market crashes. Review of Financial Studies 16, 487–525.CrossRefGoogle Scholar
Kaizoji, Taisei (2000) Speculative bubbles and crashes in stock markets: An interacting agent model of speculative activity. Physica A 287, 493–506.CrossRefGoogle Scholar
Kindleberger, Charles P. (2000) Manias, Panics, and Crashes: A History of Financial Crisis, 4th ed.New York: Wiley.CrossRefGoogle Scholar
Land Information Division (2002) Summary of White Paper on Land. Tokyo: Ministry of Land, Infrastructure and Transport. Available at http://tochi.mlit.go.jp/h14hakusho/setsu_1–1-1_eng.html; accessed 15 September 2004.Google Scholar
LeBaron, Blake (2006) Agent-based computational finance. In Tesfatsion, Leigh and Judd, Kenneth L. (eds.) Handbook of Computational Economics, vol. 2: Agent-Based Modeling, pp. 1187–1233. Amsterdam: North-Holland.Google Scholar
Leombruni, Roberto, Gallegati, Mauro, and Palestrini, Antonio (2003) Mean field effects and interaction cycles in financial markets. In Cowan, Robin and Jonard, Nicholas (eds.), Heterogeneous Agents, Interactions and Economic Performance, pp. 259–276. Berlin: Springer-Verlag.CrossRefGoogle Scholar
Lux, Thomas (1998) The socio-economic dynamics of speculative markets: Interacting agents, chaos, and the fat tail of return distributions. Journal of Economic Behavior and Organization 33, 143–165.CrossRefGoogle Scholar
Minsky, Hyman P. (1972) Financial instability revisited: The economics of disaster. Reappraisal of the Federal Reserve Discount Mechanism 3, 97–136.Google Scholar
Minsky, Hyman P. (1982) The financial instability hypothesis: Capitalistic processes and the behavior of the economy. In Kindleberger, Charles P. and Laffargue, Jean-Paul (eds.), Financial Crises: Theory, History, and Policy, pp. 12–29. Cambridge, UK: Cambridge University Press.Google Scholar
Neal, Larry D. (1990) How the South Sea Bubble was blown up and burst: A new look at old data. In White, Eugene N. (ed.), Crashes and Panics: The Lessons from History, pp. 33–56. Homewood, IL: Dow-Jones-Irwin.Google Scholar
Oudard, Georges (1928) The Amazing Life of John Law, English translation by Moore, G. E. C.. New York: Payson and Clarke.Google Scholar
Posthumus, Nicholas W. (1929) The tulip mania in Holland in the years 1636 and 1637. Journal of Economic and Business History 1, 434–466.Google Scholar
Rosser, J. Barkley Jr., (1991) From Catastrophe to Chaos: A General Theory of Economic Discontinuities. Boston: Kluwer.CrossRefGoogle Scholar
Rosser, J. Barkley Jr. (1997) Speculations on nonlinear speculative bubbles. Nonlinear Dynamics, Psychology, and Life Sciences 1, 275–300.CrossRefGoogle Scholar
Telser, Lester G. (1959) A theory of speculation relating profitability and stability. Review of Economics and Statistics 61, 295–301.CrossRefGoogle Scholar
Tirole, Jean (1982) On the possibility of speculation under rational expectations. Econometrica 50, 1163–1181.CrossRefGoogle Scholar
Wilson, Charles (1949) Anglo-Dutch Commerce and Finance in the Eighteenth Century. Cambridge, UK: Cambridge University Press.Google Scholar
Zeeman, E. Christopher (1974) On the unstable behavior of the stock exchanges. Journal of Mathematical Economics 1, 39–44.CrossRefGoogle Scholar