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Behavioral Consistent Market Equilibria under Procedural Rationality

  • Mikhail Anufriev


    (CeNDEF University of Amsterdam)

  • Giulio Bottazzi

    (LEM Sant'Anna School of Advanced Studies, Pisa)

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

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 225.

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Date of creation: 04 Jul 2006
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Handle: RePEc:sce:scecfa:225
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  1. Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 9-40, October.
  2. Day, Richard H. & Huang, Weihong, 1990. "Bulls, bears and market sheep," Journal of Economic Behavior & Organization, Elsevier, vol. 14(3), pages 299-329, December.
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  5. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  6. 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.
  7. 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.
  8. 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.
  9. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
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  11. Tesfatsion, Leigh & Judd, Kenneth L., 2006. "Handbook of Computational Economics, Vol. 2: Agent-Based Computational Economics," Staff General Research Papers 10368, Iowa State University, Department of Economics.
  12. Cars H. Hommes, 2005. "Heterogeneous Agent Models in Economics and Finance," Tinbergen Institute Discussion Papers 05-056/1, Tinbergen Institute.
  13. repec:att:wimass:9606 is not listed on IDEAS
  14. 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.
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