Boom-Busty Marketron as a Model of Market Dynamics: How Investor-Market Reflexivity Amplifies Non-Equilibrium

Abstract

We introduce the Boom-Busty Marketron, a model of a multi-asset market in which the demand of a single collective investor moves prices and itself depends on market performance. This creates an investor-market reflexive loop in the spirit of Soros's theory. The market state is stationary without being at equilibrium: a non-equilibrium steady state (NESS), with broken detailed balance and a probability current circulating between mispricing, demand and volatility. While stochastic volatility with the leverage effect already breaks detailed balance and makes the market dynamics irreversible, the investor-market loop pushes the market further away from equilibrium. Calibrated to the S\&P 500 from 1996 to 2024 by simulated moments, the model reproduces the stylised facts of returns together with quantitative metrics of the market, including cross-sectional ones, and its return and cycle statistics stay stationary for a century and a half on the 1996--2010 inputs. Its central emergent behaviour is a boom-bust cycle, whose frequency meets the S\&P's within one-sigma ranges. The model also produces a default rate of the order of that of investment-grade issuers, prices inside Fisher Black's factor of two of value, the dumb-money effect of Frazzini and Lamont, and a measurable arrow of time. Standard long-short factors built from its cross section rotate through the cycle, and so do its industry groups along the defensive axis.