IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

Market equilibria under procedural rationality

  • Anufriev, Mikhail
  • Bottazzi, Giulio

Abstract We analyze the endogenous price formation mechanism of a pure exchange economy with two assets, riskless and risky. The economy is populated by an arbitrarily large number of traders whose investment choices are described by means of generic smooth functions of past realizations. These choices can be consistent with (but not limited to) the solutions of expected utility maximization problems. Under the assumption that individual demand for the risky asset is expressed as a fraction of individual wealth, we derive a complete characterization of equilibria. It is shown that irrespectively of the number of agents and of their behavior, all possible equilibria belong to a one-dimensional "Equilibrium Market Curve". This geometric tool helps to illustrate the possibility of different phenomena, as multiple equilibria, and can be used for comparative static analysis. We discuss the relative performances of different strategies and the selection principle governing market dynamics on the basis of the stability analysis of equilibria.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.sciencedirect.com/science/article/pii/S0304-4068(10)00101-1
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Mathematical Economics.

Volume (Year): 46 (2010)
Issue (Month): 6 (November)
Pages: 1140-1172

as
in new window

Handle: RePEc:eee:mateco:v:46:y:2010:i:6:p:1140-1172
Contact details of provider: Web page: http://www.elsevier.com/locate/jmateco

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. repec:att:wimass:9621 is not listed on IDEAS
  2. Cars Hommes & Carl Chiarella & Xue-Zhong He, 2004. "A Dynamical Analysis of Moving Average Rules," Computing in Economics and Finance 2004 238, Society for Computational Economics.
  3. Domenico Colucci & Vincenzo Valori, 2005. "Ways of learning in a simple economic setting: a comparison," Working Papers - Mathematical Economics 2005-01, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
  4. De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990. "Noise Trader Risk in Financial Markets," Scholarly Articles 3725552, Harvard University Department of Economics.
  5. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
  6. Evstigneev, Igor V. & Hens, Thorsten & Schenk-Hoppé, Klaus Reiner, 2008. "Globally evolutionarily stable portfolio rules," Journal of Economic Theory, Elsevier, vol. 140(1), pages 197-228, May.
  7. Jean-Michel Grandmont, 1997. "Expectations Formation and Stability of Large Socioeconomic Systems," Working Papers 97-27, Centre de Recherche en Economie et Statistique.
  8. Daniel Kahneman, 2003. "Maps of Bounded Rationality: Psychology for Behavioral Economics," American Economic Review, American Economic Association, vol. 93(5), pages 1449-1475, December.
  9. Igor Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, . "Evolutionary Stable Stock Markets," IEW - Working Papers 170, Institute for Empirical Research in Economics - University of Zurich.
  10. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186 Elsevier.
  11. R Amir & I Evstigneev & T Hens & K R Schenk-Hoppé, 2002. "Market Selection and Survival of Investment Strategies," The School of Economics Discussion Paper Series 0215, Economics, The University of Manchester.
  12. Xue-Zhong (Tony) He & Carl Chiarella, 2001. "Asset Price and Wealth Dynamics under Heterogeneous Expectations," CeNDEF Workshop Papers, January 2001 5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  13. Rabah AMIR & Igor V. EVSTIGNEEV & Le XU, . "Strategies of Survival in Dynamic Asset Market Games," Swiss Finance Institute Research Paper Series 08-41, Swiss Finance Institute.
  14. Hens, Thorsten & Schenk-Hoppe, Klaus Reiner, 2005. "Evolutionary stability of portfolio rules in incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 43-66, February.
  15. Mikhail Anufriev & Pietro Dindo, 2007. "Wealth-driven Selection in a Financial Market with Heterogeneous Agents," LEM Papers Series 2007/27, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  16. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  17. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  18. J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, . "The Survival of Noise Traders in Financial Markets," J. Bradford De Long's Working Papers _123, University of California at Berkeley, Economics Department.
  19. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  20. Carl Chiarella & Roberto Dieci & Laura Gardini, 2004. "Asset Price and Wealth Dynamics in a Financial Market with Heterogeneous Agents," Research Paper Series 134, Quantitative Finance Research Centre, University of Technology, Sydney.
  21. William A. Brock & Charles F. Manski, 2008. "Competitive Lending with Partial Knowledge of Loan Repayment," NBER Working Papers 14378, National Bureau of Economic Research, Inc.
  22. Mikhail Anufriev, 2008. "Wealth-driven competition in a speculative financial market: examples with maximizing agents," Quantitative Finance, Taylor & Francis Journals, vol. 8(4), pages 363-380.
  23. Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2002. "Evolutionary dynamics in markets with many trader types," CeNDEF Working Papers 02-10, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
  24. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
  25. Igor V. Evstigneev & Thorsten Hens & Klaus Reiner Schenk-Hoppé, 2008. "Evolutionary Finance," Swiss Finance Institute Research Paper Series 08-14, Swiss Finance Institute.
  26. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  27. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental tests of the mean-variance model for portfolio selection," Organizational Behavior and Human Decision Processes, Elsevier, vol. 42(3), pages 388-410, December.
  28. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, number 9780521551861, 1.
  29. Medio,Alfredo & Lines,Marji, 2001. "Nonlinear Dynamics," Cambridge Books, Cambridge University Press, number 9780521558747, 1.
  30. Jorgen W. Weibull, 1997. "Evolutionary Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262731215, June.
  31. Alan Kirman, 2006. "Heterogeneity in Economics," Journal of Economic Interaction and Coordination, Springer, vol. 1(1), pages 89-117, May.
  32. Brock, William A. & Hommes, Cars H., 1998. "Heterogeneous beliefs and routes to chaos in a simple asset pricing model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(8-9), pages 1235-1274, August.
  33. John Conlisk, 1996. "Why Bounded Rationality?," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 669-700, June.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:mateco:v:46:y:2010:i:6:p:1140-1172. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.