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A Multi-Asset Flow Model of Investor Behavior, Stability, and Contagion

Article arXiv papers · Author: Mario Cavani
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Summary

The paper develops a model of multiple assets traded by investor groups with different strategies: some follow trends while others base decisions on fundamental value. It extends behavioral finance frameworks by representing finite cash and shares, asymmetric links between assets in buying decisions, and wealth shifting between investor groups. The model uses ordinary differential equations to describe prices, holdings, cash, and sentiment, and establishes positivity and boundedness for relevant variables.

The analysis characterizes equilibria and uses linear stability analysis to identify conditions under which the fundamental equilibrium gives way to recurring price cycles through a supercritical Hopf bifurcation. Simulations are reported to reproduce predictions from three benchmark models, including asymmetric contagion patterns. These results concern a theoretical framework and numerical validation; the supplied description does not provide empirical market testing or enough detail to judge parameter sensitivity or practical forecasting value.

Key ideas

  • The model combines multiple assets and investor groups using trend-following and fundamental strategies.
  • It represents finite cash and share supplies, cross-asset buying links, and wealth redistribution.
  • The authors establish positivity and boundedness for physically relevant model variables.
  • Stability analysis identifies conditions for a Hopf bifurcation and persistent cycles.
  • Numerical simulations reproduce benchmark predictions, but the description reports no empirical market test.

Tags

Multi-assetMomentumStatisticsMarket microstructure
Full text
# The fused asset flow model: stability, bifurcation, and contagion in multi-asset markets with heterogeneous investors


# The fused asset flow model: stability, bifurcation, and contagion in multi-asset markets with heterogeneous investors









This paper presents a unified multi-asset, multi-group asset-flow model that integrates three foundational frameworks from the behavioral finance literature. The model captures the dynamics of financial markets where multiple assets are traded by multiple investor groups, each with distinct trend-following (momentum) and value-based (fundamental) strategies. Unlike classical efficient market models, our framework explicitly incorporates the finiteness of cash and shares, asymmetric cross-asset coupling in buying decisions, and endogenous wealth redistribution across groups. We derive the complete system of ordinary differential equations governing price, cash, share, and sentiment dynamics, and establish the fundamental properties of positivity and boundedness for all physically relevant variables. The equilibrium set is characterized as a manifold parameterized by cash distribution, with the fundamental equilibrium as a special point. Through linear stability analysis, we identify conditions under which the fundamental equilibrium loses stability via a supercritical Hopf bifurcation, giving rise to persistent limit cycles. The model is validated against three benchmark papers: the single-asset multi-group model of DeSantis, Swigon, and Caginalp (2012); the two-asset single-group model of Bulut, Merdan, and Swigon (2019); and the two-asset two-group Nigeria-Libya oil market model of Cavani (2026). Our numerical simulations reproduce all key theoretical predictions, including equilibrium manifolds, Hopf bifurcation thresholds, limit cycle periods, and asymmetric contagion patterns.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.