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Investments in random environments

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  • Navarro-Barrientos, Jesús Emeterio
  • Cantero-Álvarez, Rubén
  • Matias Rodrigues, João F.
  • Schweitzer, Frank

Abstract

We present analytical investigations of a multiplicative stochastic process that models a simple investor dynamics in a random environment. The dynamics of the investor’s budget, x(t), depends on the stochasticity of the return on investment, r(t), for which different model assumptions are discussed. The fat-tail distribution of the budget is investigated and compared with theoretical predictions. We are mainly interested in the most probable value xmp of the budget that reaches a constant value over time. Based on an analytical investigation of the dynamics, we are able to predict xmpstat. We find a scaling law that relates the most probable value to the characteristic parameters describing the stochastic process. Our analytical results are confirmed by stochastic computer simulations that show a very good agreement with the predictions.

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Bibliographic Info

Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 387 (2008)
Issue (Month): 8 ()
Pages: 2035-2046

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Handle: RePEc:eee:phsmap:v:387:y:2008:i:8:p:2035-2046

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Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

Related research

Keywords: Multiplicative stochastic processes; Scaling laws; Investment dynamics;

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References

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Cited by:
  1. Emeterio Navarro & Ruben Cantero & Joao Rodrigues & Frank Schweitzer, 2007. "Investments in Random Environments," Papers 0709.3630, arXiv.org, revised Sep 2008.
  2. J. Emeterio Navarro Barrientos & Frank E. Walter & Frank Schweitzer, 2008. "Risk-Seeking versus Risk-Avoiding Investments in Noisy Periodic Environments," Papers 0801.4305, arXiv.org, revised Sep 2008.

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