This Letter investigates the stochastic dynamics of a simplified agent-based microscopic model describing stock market evolution. Our mathematical model includes a stochastic market and a sealed-bid double auction. The dynamics of the model are determined by the game of two types of traders: (i) 'intelligent' traders whose strategy is based on nonlinear technical data analysis1 and (ii) 'random' traders that act without a consistent strategy. We demonstrate the effect of time-scale separations on the market dynamics. We study the characteristics of the market relaxation in response to perturbations caused by large cash flows generated between these two groups of traders. We also demonstrate that our model exhibits the formation of a price bubble2 and the subsequent transition to a bear market. (C) 2000 Elsevier Science B.V.
- Complex dynamics
- Non-equilibrium phenomena
- Stochastic processes
- Theory and models of chaotic systems