On the inherent instability of international financial markets : natural nonlinear interactions between stock and foreign exchange markets

Faculty/Professorship: Economic Policy  
Author(s): Dieci, Roberto; Westerhoff, Frank H.  
Other Contributing Persons: Stübben, Felix
Corporate Body: BERG (Bamberg Economic Research Group)
Publisher Information: Bamberg : opus
Year of publication: 2013
Pages: 56
ISBN: 978-3-931052-89-8
Series ; Volume: BERG working paper series ; 79 
Source/Other editions: zuerst erschienen im BERG-Verlag, 2011
Year of first publication: 2011
Language(s): English
Licence: German Act on Copyright 
URN: urn:nbn:de:bvb:473-opus4-31905
We develop a novel financial market model in which the stock markets of two countries are linked via and with the foreign exchange market. To be precise, there are domestic and foreign speculators in each of the two stock markets which rely either on linear technical or linear fundamental trading strategies to determine their orders. Since foreign stock market speculators require foreign currency to conduct their trades, all three markets are connected. Our setup entails a natural nonlinearity which may cause persistent endogenous price dynamics. Moreover, we analytically show that market interactions can destabilize the model’s fundamental steady state.
GND Keywords: Kreditmarkt; Wechselkurs; Aktienanalyse; Dynamisches Modell
Keywords: Stock prices; exchange rates; market stability; technical and fundamental analysis; nonlinear market interactions; endogenous dynamics.
RVK Classification: QK 650   
Type: Workingpaper
URI: https://fis.uni-bamberg.de/handle/uniba/1394
Year of publication: 20. December 2013

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