A simple financial market model with chartists and fundamentalists: Market entry levels and discontinuities

We present a simple …nancial market model with interacting chartists and fundamentalists. Since some of these speculators only become active when a certain misalignment level has been crossed, the dynamics are driven by a discontinuous piecewise linear map. The model endogenously generates bubbles and crashes and excess volatility for a broad range of parameter values – and thus explains some key phenomena of …nancial markets. Moreover, we provide a complete analytical study of the model’s dynamical system. One of its surprising features is that model simulations may appear to be chaotic, although only regular dynamics can emerge. Keywords: …nancial market crisis; bull and bear market dynamics; discontinuous piecewise linear maps; border-collision bifurcations; period adding scheme.