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Non-ergodic Behavior in a Financial Market with Interacting Investors

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  • Ulrich Horst

    ()
    (University of British Columbia)

  • Jan Wezelburger

Abstract

We identify possible long-run market shares and the long-run asset price dynamics of financial markets with heterogenous interacting agents. This involves stability conditions for a class of difference equation in a random environment, where the random environment is endogenously generated by agents' investment behavior. Depending on the evaluation of a performance measure of an investment, asset prices may behave in a non-ergodic manner. That is, the price processes converge in distribution, but the limiting distribution is not necessarily uniquely determined. The long-run market shares of two competing financial mediators may strongly depend on the random environment which is endogenously generated by a noise traders

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 229.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:229

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Keywords: financial markets; interaction; random difference equations; stochastic approximation;

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