Behavioral Consistent Market Equilibria under Procedural Rationality
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
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.:
- Zschischang, Elmar & Lux, Thomas, 2001. "Some new results on the Levy, Levy and Solomon microscopic stock market model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 291(1), pages 563-573.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann,, "undated".
"The Survival of Noise Traders in Financial Markets,"
J. Bradford De Long's Working Papers
_123, University of California at Berkeley, Economics Department.
- De Long, J Bradford, et al, 1991. "The Survival of Noise Traders in Financial Markets," The Journal of Business, University of Chicago Press, vol. 64(1), pages 1-19, January.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1991. "The Survival of Noise Traders in Financial Markets," Scholarly Articles 3725470, Harvard University Department of Economics.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1988. "The Survival of Noise Traders in Financial Markets," NBER Working Papers 2715, National Bureau of Economic Research, Inc.
- Cars H. Hommes, 2005.
"Heterogeneous Agent Models in Economics and Finance,"
Tinbergen Institute Discussion Papers
05-056/1, Tinbergen Institute.
- 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.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Mikhail Anufriev, 2005.
"Wealth-Driven Competition in a Speculative Financial Market: Examples with Maximizing Agents,"
LEM Papers Series
2005/27, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
- 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.
- Anufriev, M., 2005. "Wealth-Driven Competition in a Speculative Financial Market: Examples With Maximizing Agents," CeNDEF Working Papers 05-17, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
- 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.
- 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.
- Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers Archive 10368, Iowa State University, Department of Economics.
- Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
- Day, Richard H. & Huang, Weihong, 1990.
"Bulls, bears and market sheep,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 14(3), pages 299-329, December.
- LeBaron, Blake, 2006. "Agent-based Computational Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 24, pages 1187-1233 Elsevier.
- Brock, W.A., 1996. "Asset Price Behavior in Complex Environments," Working papers 9606, Wisconsin Madison - Social Systems.
- Levy, Moshe & Levy, Haim & Solomon, Sorin, 1994. "A microscopic model of the stock market : Cycles, booms, and crashes," Economics Letters, Elsevier, vol. 45(1), pages 103-111, May.
When requesting a correction, please mention this item's handle: RePEc:sce:scecfa:225. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.