Chartists are assumed to have the same utility function as the fundamentalists. Their behavior is formalized as maximizing the utility function

v = α(yt + pt+1cxtc) + βxtc – (1+ βxtc) log (1+ βxtc) —– (1)

subject to the budget constraint

ytc + ptxtc = 0 —– (2)

where xtc and ytc represent the chartist’s excess demand for stock and for money at period t, and pt+1c denotes the price expected by him. The chartist’s excess demand function for the stock is given by

xtc = 1/β (exp α (pt+1– pt)/β – 1) —– (3)

His expectation formation is as follows: He is assumed to forecast the future price pt+1c using adaptive expectations,

pt+1c  = pt + μ (p– ptc) —– (4)

where the parameter µ(0 < µ < 1) is a so-called error correction coefficient. Chartists’ decisions are based on observation of the past price-data. This type of trader, who simply extrapolates patterns of past prices, is a common stylized example, currently in popular use in heterogeneous agent models. It follows that chartists try to buy stock when they anticipate a rising price for the next period, and, in contrast, try to sell stock when they expect a falling price.


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