What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary

Righi, Simone and Yuri, Biondi (2015) What does the financial market pricing do? A simulation analysis with a view to systemic volatility, exuberance and vagary. Journal of Economic Interaction and Coordination. pp. 1-29. ISSN 1860-711X (Print) 1860-7128 (Online)

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Abstract

Biondi et al. (Phys A 391(22):5532–5545, 2012) develop an analytical model to examine the emergent dynamic properties of share market price formation over time, capable to capture important stylized facts. These latter properties prove to be sensitive to regulatory regimes for fundamental information provision, as well as to market confidence conditions among actual and potential investors. We comparatively assess accounting models belonging to two main families: historical cost accounting and mark-to-market (fair value) accounting regimes. Regimes based upon mark-to-market measurement of traded security, while generating higher linear correlation between market prices and fundamental signals, also involve higher market instability and volatility. These regimes also incur more relevant episodes of market exuberance and vagary in some regions of the market confidence space, where lower market liquidity further occurs.

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