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Behavioral Consistent Market Equilibria under Procedural Rationality

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  • Mikhail Anufriev

    ()
    (CeNDEF University of Amsterdam)

  • Giulio Bottazzi

    (LEM Sant'Anna School of Advanced Studies, Pisa)

Abstract

In this paper we analyze a dynamic, asset pricing model where an arbitrary number of heterogeneous, procedurally rational investors divide their wealth between two assets. Both fundamental dividend process and behavior of traders are modeled in a very general way. In particular, agents' choices are described by means of the generic smooth functions defined on a commonly available information set. The choices are consistent with (but not limited to) the solutions of the expected utility maximization problems. As a natural rest point of the corresponding dynamics we propose the notion of the Behavioral Consistent Equilibria (BCE) where the aggregate dynamics are consistent with the agents' investment choices. We show that provided that the dividend process is given, all possible equilibria of the system can be characterized by means of one-dimensional Equilibrium Market Line (EML). This geometric tool allows to separate the effects of dividend process and agents' behaviors on the aggregate dynamics. Namely, the precise shape of this line depends on the character of the dividend process, but the realized equilibrium, i.e.~a point on the line, is determined by the ecology of agents' behaviors. We argue that the EML can be useful in investigation of the questions of existence, multiplicity and stability of the BCE and provide corresponding examples. The EML also allows to make the comparative static exercises in a framework with heterogeneous agents and discuss the relative performances of different strategies. The notion of BCE can be considered as a generalization of the Rational Expectations Equilibrium on the framework with heterogeneous traders. It can be, therefore, useful also in other fields of economics where heterogeneity of actors plays an important role for the aggregate outcome

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 225.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:225

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Keywords: Asset Pricing Model; Procedural Rationality; Heterogeneous Agents; CRRA Framework; Equilibrium Market Line; Stability Analysis; Multiple Equilibria.;

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  10. Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2003. "Evolutionary Stability of Portfolio Rules in Incomplete Markets," Discussion Papers 03-03, University of Copenhagen. Department of Economics.
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  14. repec:att:wimass:9606 is not listed on IDEAS
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