A multi-market model with heterogeneous agents and switching mechanism

This paper presents a multi-market model consisting of two distinct financial markets with one risky asset. The model assumes that each market is populated by two types of interacting traders: fundamentalists and cross-sectional momentum traders. A market maker sets the price based on a nonlinear adjustment mechanism. We prove that, depending on the relative influence of traders’ beliefs, the asset dynamics can exhibit large-amplitude fluctuations. Through bifurcation analysis, we derive analytical conditions that show how the intensity of investors’ preferences for trading rules and the switching mechanism can destabilize the markets. Furthermore, we show that when investors hold polarized beliefs, it can introduce significant uncertainty in both markets, leading to complex price dynamics.