Price and Wealth Dynamics in a Speculative Market with Generic Procedurally Rational Traders
AbstractAn agent-based model of a simple financial market with arbitrary number of traders having relatively general behavioral specifications is analyzed. In a pure exchange economy with two assets, riskless and risky, trading takes place in discrete time under endogenous price formation setting. Traders' demands for the risky asset are expressed as fractions of their individual wealths, so that the dynamical system in terms of wealth and return is obtained. Agents' choices, i.e. investment fractions, are described by means of the generic smooth functions of an infinite information set. The choices can be consistent with (but not limited to) the solutions of the expected utility maximization problems. A complete characterization of equilibria is given. It is shown that irrespectively of the number of agents and of their behavior, all possible equilibria belong to a one-dimensional "Equilibrium Market Line". This geometric tool helps to illustrate possibility of different phenomena, like multiple equilibria, and also can be used for comparative static analysis. The stability conditions of equilibria are derived for general model specification and allow to discuss the relative performances of different strategies and the selection principle governing market dynamics.
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Bibliographic InfoPaper provided by Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance in its series CeNDEF Working Papers with number 06-02.
Date of creation: 2006
Date of revision:
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Other versions of this item:
- Gulio Bottazzi & Mikhail Anufriev, 2006. "Price and Wealth Dynamics in a Speculative Market with Generic Procedurally Rational Traders," Working Papers wp06-02, Warwick Business School, Finance Group.
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