A Mathematical Model of Financial Bubbles: A Behavioral Approach

Andrei Afilipoaei, Gustavo Carrero

Research output: Contribution to journalJournal Articlepeer-review

Abstract

In this work, we propose a mathematical model to describe the price trends of unsustainable growth, abrupt collapse, and eventual stabilization characteristic of financial bubbles. The proposed model uses a set of ordinary differential equations to depict the role played by social contagion and herd behavior in the formation of financial bubbles from a behavioral standpoint, in which the market population is divided into neutral, bull (optimistic), bear (pessimistic), and quitter subgroups. The market demand is taken to be a function of both price and bull population, and the market supply is taken to be a function of both price and bear population. In such a manner, the spread of optimism and pessimism controls the supply and demand dynamics of the market and offers a dynamical characterization of the asset price behavior of a financial bubble.

Original languageEnglish
Article number4102
JournalMathematics
Volume11
Issue number19
DOIs
Publication statusPublished - Oct. 2023

Keywords

  • asset bubbles
  • behavioral economics
  • financial bubble model
  • financial bubbles
  • herd behavior
  • social contagion
  • tulipmania

Fingerprint

Dive into the research topics of 'A Mathematical Model of Financial Bubbles: A Behavioral Approach'. Together they form a unique fingerprint.

Cite this