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A Simple Micro-Model of Market Dynamics Part I: The "Homogenous Agents" Deterministic Limit

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  • Giulio Bottazzi

Abstract

In this paper we present a simple agent based model aimed to the qualitative description of some ``stylized facts'' typical of financial markets. The framework is a simple two assets model: a riskless bond, with a constant riskless return and a risky stock, paying constant dividends. Both the riskless rate of return and the dividends process are assumed known to the agents. Starting from aggregate excess demand the risky asset price is fixed via Walrasian auction. The market participants are speculators described as myopic utility maximizer and are embedded with limited forecasting ability. The exact expressions of the utility function and the forecasting procedure are chosen in order to admit a simple analytic treatment of the market dynamics in the deterministic limit of homogeneous agents. However, a short discussion of the effect of different choices is proposed. We find that in the deterministic limit the model posses many ``phases''. In particular, the no-arbitrage ``fundamental'' price can emerge as a stable fixed point, while for different parameterizations the market shows chaotic dynamics with speculative bubbles and crashes.

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Bibliographic Info

Paper provided by Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy in its series LEM Papers Series with number 2002/10.

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Date of creation: 14 Dec 2002
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Handle: RePEc:ssa:lemwps:2002/10

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Related research

Keywords: Agent-based Simulation; Financial Markets; Heterogeneous Agents; Computational Economics.;

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Cited by:
  1. Giulio Bottazzi & Giovanna Devetag & Francesca Pancotto, 2009. "Does Volatility matter? Expectations of price return and variability in an asset pricing experiment," LEM Papers Series 2009/02, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  2. Mikhail Anufriev & Giulio Bottazzi & Francesca Pancotto, 2004. "Price and Wealth Asymptotic Dynamics with CRRA Technical Trading Strategies," LEM Papers Series 2004/23, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  3. Giulio Bottazzi & Giovanna Devetag, 2005. "Expectations structure in asset pricing experiments," CEEL Working Papers 0503, Cognitive and Experimental Economics Laboratory, Department of Economics, University of Trento, Italia.
  4. Mikhail Anufriev & Giulio Bottazzi, 2004. "Asset Pricing Model with Heterogeneous Investment Horizons," LEM Papers Series 2004/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.

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