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Wealth-Driven Competition in a Speculative Financial Market: Examples with Maximizing Agents

  • Mikhail Anufriev

This paper demonstrates how both quantitative and qualitative results of general, analytically tractable asset-pricing model in which heterogeneous agents behave consistently with a constant relative risk aversion assumption can be applied to the particular case of ``linear'' investment choices. In this way it is shown how the framework developed in Anufriev and Bottazzi (2005) can be used inside the classical setting with demand derived from utility maximization. Consequently, some of the previous contributions of the agent-based literature are generalized. In the course of the analysis of asymptotic market behavior the main attention is paid to a geometric approach which allows to visualize all possible equilibria by means of a simple one-dimensional curve referred as the Equilibrium Market Line. The case of linear (particularly, mean-variance) investment functions thoroughly analyzed in this paper allows to highlight those features of the asymptotic dynamics which are common to all types of the CRRA-investment behavior and those which are specific for the linear investment functions.

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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 2005/27.

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Date of creation: 15 Dec 2005
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Handle: RePEc:ssa:lemwps:2005/27
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  1. Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
  2. Chiarella, Carl & Dieci, Roberto & Gardini, Laura, 2006. "Asset price and wealth dynamics in a financial market with heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1755-1786.
  3. repec:att:wimass:9621 is not listed on IDEAS
  4. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  5. 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.
  6. 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.
  7. Day, R. & Huang, W., 1988. "Bulls, Bears And Market Sheep," Papers m8822, Southern California - Department of Economics.
  8. Mikhail Anufriev & Giulio Bottazzi, 2005. "Price and Wealth Dynamics in a Speculative Market with an Arbitrary Number of Generic Technical Traders," LEM Papers Series 2005/06, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
  9. Carl Chiarella & Xue-Zhong He, 2001. "Asset Price and Wealth Dynamics Under Heterogeneous Expectations," Research Paper Series 56, Quantitative Finance Research Centre, University of Technology, Sydney.
  10. 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.
  11. repec:att:wimass:9725 is not listed on IDEAS
  12. Carl Chiarella & Xue-Zhong He, 2002. "An Adaptive Model on Asset Pricing and Wealth Dynamics with Heterogeneous Trading Strategies," Research Paper Series 84, Quantitative Finance Research Centre, University of Technology, Sydney.
  13. Gulio Bottazzi & Mikhail Anufriev, 2006. "Price and Wealth Dynamics in a Speculative Market with Generic Procedurally Rational Traders," Working Papers wp06-02, Warwick Business School, Finance Group.
  14. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942, March.
  15. 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.
  16. Franke, Reiner & Sethi, Rajiv, 1998. "Cautious trend-seeking and complex asset price dynamics," Research in Economics, Elsevier, vol. 52(1), pages 61-79, March.
  17. 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.
  18. Carl Chiarella, 1992. "The Dynamics of Speculative Behaviour," Working Paper Series 13, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
  19. Brock, William A. & Hommes, Cars H. & Wagener, Florian O. O., 2005. "Evolutionary dynamics in markets with many trader types," Journal of Mathematical Economics, Elsevier, vol. 41(1-2), pages 7-42, February.
  20. LeBaron, Blake & Arthur, W. Brian & Palmer, Richard, 1999. "Time series properties of an artificial stock market," Journal of Economic Dynamics and Control, Elsevier, vol. 23(9-10), pages 1487-1516, September.
  21. Anufriev, Mikhail & Bottazzi, Giulio & Pancotto, Francesca, 2006. "Equilibria, stability and asymptotic dominance in a speculative market with heterogeneous traders," Journal of Economic Dynamics and Control, Elsevier, vol. 30(9-10), pages 1787-1835.
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