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Wealth-driven Selection in a Financial Market with Heterogeneous Agents

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Author Info
Mikhail Anufriev
Pietro Dindo

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Abstract

We study the co-evolution of asset prices and individual wealth in a financial market populated by an arbitrary number of heterogeneous boundedly rational investors. Using wealth dynamics as a selection device we are able to characterize the long run market outcomes, i.e. asset returns and wealth distributions, for a general class of investment behaviors. Our investigation illustrates that market interaction and wealth dynamics pose certain limits on the outcome of agents' interactions even within the ``wilderness of bounded rationality''. As an application we consider the case of heterogenous mean-variance optimizers and provide insights into the results of the simulation model introduced in Levy, Levy and Solomon (1994).

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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 2007/27.

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Date of creation: 19 Dec 2007
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Handle: RePEc:ssa:lemwps:2007/27

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Related research
Keywords: Heterogeneous agents; Asset pricing model; Bounded rationality; CRRA framework; Levy-Levy-Solomon model; Evolutionary Finance.;

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  1. Anufriev, M. & Panchenko, V., 2007. "Asset Prices, Traders' Behavior, and Market Design," CeNDEF Working Papers 07-14, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance. [Downloadable!]
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