On possible origins of trends in financial market price changes

Abstract

We investigate possible origins of the trends in financial markets, where trend we refer to as is a relatively long-term fluctuation observed in price change (price movement), using a simple deterministic threshold model that contains no external driving force term to generate trends forcibly. We find that the trend can be generated by this simple model without any external driving force. Furthermore, from thorough numerical simulations, we obtain two following results: (i) a trend of monotonic increase or decrease can be generated only by dealers’ minuscule price updates for the next deal trying to follow an expected forthcoming direction of price change, (ii) non-monotonic trends spontaneously emerge when dealers cannot obtain accurate information about the number of dealers participating in the next deal. We conclude from these results that the emergence of trends is not necessarily generated by an external driving force but by a natural outcome of the accumulation of minuscule price updates of individual dealers with insufficient information about the next deal.