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Wealth-driven selection in a financial market with heterogeneous agents

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  • Anufriev, Mikhail
  • Dindo, Pietro

Abstract

We study the co-evolution of asset prices and individual wealth in a financial market with an arbitrary number of heterogeneous boundedly rational investors. Using wealth dynamics as a selection device we are able to characterize the long run market outcomes, i.e., asset returns and wealth distributions, for a general class of competing investment behaviors. Our investigation illustrates that market interaction and wealth dynamics pose certain limits on the outcome of agents' interactions even within the "wilderness of bounded rationality". As an application we consider the case of heterogeneous mean-variance optimizers and provide insights into the results of the simulation model introduced by Levy, Levy and Solomon (1994).

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Behavior & Organization.

Volume (Year): 73 (2010)
Issue (Month): 3 (March)
Pages: 327-358

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Handle: RePEc:eee:jeborg:v:73:y:2010:i:3:p:327-358

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Related research

Keywords: Heterogeneous agents Asset pricing model CRRA framework Levy-Levy-Solomon model Evolutionary finance;

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References

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Citations

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Cited by:
  1. Anufriev, M. & Bottazzi, G., 2009. "Market Equilibria under Procedural Rationality (revised version of WP 06-02)," CeNDEF Working Papers 09-11, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  2. Anufriev, Mikhail & Bottazzi, Giulio, 2010. "Market equilibria under procedural rationality," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1140-1172, November.
  3. Giulio Bottazzi & Pietro Dindo, 2013. "Selection in asset markets: the good, the bad, and the unknown," Journal of Evolutionary Economics, Springer, Springer, vol. 23(3), pages 641-661, July.
  4. Anufriev, M. & Bottazzi, G. & Marsili, M. & Pin, P., 2011. "Excess Covariance and Dynamic Instability in a Multi-Asset Model," CeNDEF Working Papers 11-09, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  5. Giulio Bottazzi & Pietro Dindo, 2010. "Evolution and market behavior with endogenous investment rules," LEM Papers Series 2010/20, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  6. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2010. "Time-Varying Beta: A Boundedly Rational Equilibrium Approach," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 275, Quantitative Finance Research Centre, University of Technology, Sydney.
  7. Hommes, C.H., 2010. "The Heterogeneous Expectations Hypothesis: Some Evidence from the Lab," CeNDEF Working Papers 10-06, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  8. Chauveau, Th. & Subbotin, A., 2013. "Price dynamics in a market with heterogeneous investment horizons and boundedly rational traders," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 37(5), pages 1040-1065.
  9. Hai-Chuan Xu & Wei Zhang & Xiong Xiong & Wei-Xing Zhou, 2014. "Wealth share analysis with "fundamentalist/chartist" heterogeneous agents," Papers 1405.5939, arXiv.org.
  10. He, Xue-Zhong & Zheng, Min, 2010. "Dynamics of moving average rules in a continuous-time financial market model," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 76(3), pages 615-634, December.
  11. Darong Dai, 2013. "Wealth Martingale and Neighborhood Turnpike Property In Dynamically Complete Market With Heterogeneous Investors," Economic Research Guardian, Weissberg Publishing, Weissberg Publishing, vol. 3(2), pages 86-110, December.
  12. Blake LeBaron, 2011. "Active and Passive Learning in Agent-based Financial Markets," Eastern Economic Journal, Palgrave Macmillan, vol. 37(1), pages 35-43.
  13. Xue-Zhong He, 2012. "Recent Developments on Heterogeneous Beliefs and Adaptive Behaviour of Financial Markets," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 316, Quantitative Finance Research Centre, University of Technology, Sydney.
  14. Igor V. EVSTIGNEEVY & Thorsten HENS & Klaus Reiner SCHENK-HOPPE, . "An evolutionary financial market model with a risk-free asset," Swiss Finance Institute Research Paper Series, Swiss Finance Institute 10-36, Swiss Finance Institute.
  15. Xue-Zhong He & Kai Li, 2011. "Heterogeneous Beliefs and Adaptive Behaviour in a Continuous-Time Asset Price Model," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 291, Quantitative Finance Research Centre, University of Technology, Sydney.
  16. Anufriev, Mikhail & Panchenko, Valentyn, 2009. "Asset prices, traders' behavior and market design," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 33(5), pages 1073-1090, May.
  17. He, Xue-Zhong & Li, Kai, 2012. "Heterogeneous beliefs and adaptive behaviour in a continuous-time asset price model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 36(7), pages 973-987.
  18. Giovanni Dosi, 2012. "Economic Coordination and Dynamics: Some Elements of an Alternative "Evolutionary" Paradigm," LEM Papers Series 2012/08, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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