What happens when trend-followers and contrarians interplay in stock market

Abstract

We analyze some basic properties of the stock price dynamical model when trend-followers and contrarians interplay with each other. We prove that the price dynamical model has an infinite number of equilibriums, but all these equilibriums are unstable. We demonstrate the short-term predictability of the price volatility and derive the detailed formulas of the Lyapunov exponent as functions of the model parameters. We show that although the price is chaotic, the volatility converges to some constant very quickly at the rate of the Lyapunov exponent. We extract the formula relating the converged volatility to the model parameters based on Monte-Carlo simulations.