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Investments in random environments

Author

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  • Navarro-Barrientos, Jesús Emeterio
  • Cantero-Álvarez, Rubén
  • Matias Rodrigues, João F.
  • Schweitzer, Frank

Abstract

We present analytical investigations of a multiplicative stochastic process that models a simple investor dynamics in a random environment. The dynamics of the investor’s budget, x(t), depends on the stochasticity of the return on investment, r(t), for which different model assumptions are discussed. The fat-tail distribution of the budget is investigated and compared with theoretical predictions. We are mainly interested in the most probable value xmp of the budget that reaches a constant value over time. Based on an analytical investigation of the dynamics, we are able to predict xmpstat. We find a scaling law that relates the most probable value to the characteristic parameters describing the stochastic process. Our analytical results are confirmed by stochastic computer simulations that show a very good agreement with the predictions.

Suggested Citation

  • Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008. "Investments in random environments," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(8), pages 2035-2046.
    • Handle: RePEc:eee:phsmap:v:387:y:2008:i:8:p:2035-2046
    DOI: 10.1016/j.physa.2007.11.029
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    1. Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008. "Investments in random environments," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(8), pages 2035-2046.
    2. J. Emeterio Navarro-Barrientos & Frank E. Walter & Frank Schweitzer, 2008. "Risk-Seeking Versus Risk-Avoiding Investments In Noisy Periodic Environments," International Journal of Modern Physics C (IJMPC), World Scientific Publishing Co. Pte. Ltd., vol. 19(06), pages 971-994.

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