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Title:On the inherent instability of international financial markets: Natural nonlinear interactions between stock and foreign exchange markets PDF Logo
Authors:Dieci, Roberto
Westerhoff, Frank
Issue Date:2011
Series/Report no.:BERG working paper series on government and growth 79
Abstract: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.
Subjects:Stock prices
exchange rates
market stability
technical and fundamental analysis
nonlinear market interactions
endogenous dynamics
Document Type:Working Paper
Appears in Collections:BERG Working Paper Series, Universität Bamberg

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