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Investments in Random Environments

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  • Emeterio Navarro
  • Ruben Cantero
  • Joao Rodrigues
  • Frank Schweitzer

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. Weare mainly interested in the most probable value $x_mp$ of the budget that reaches a constant value over time. Based on an analytical investigation of the dynamics, we are able to predict $x_mp^stat$. 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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File URL: http://arxiv.org/pdf/0709.3630
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Bibliographic Info

Paper provided by arXiv.org in its series Papers with number 0709.3630.

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Date of creation: Sep 2007
Date of revision: Sep 2008
Publication status: Published in Physica A, vol. 387, no. 8-9 (2008), pp. 2035-2046
Handle: RePEc:arx:papers:0709.3630

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Cited by:
  1. Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008. "Investments in random environments," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 387(8), pages 2035-2046.
  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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