Endogenous equilibria in liquid markets with frictions and boundedly rational agents
In this paper we propose a simple binary mean field game, where N agents may decide whether to trade or not a share of a risky asset in a liquid market. The asset's returns are endogenously determined taking into account demand and transaction costs. Agents' utility depends on the aggregate demand, which is determined by all agents' observed and forecasted actions. Agents are boundedly rational in the sense that they can go wrong choosing their optimal strategy. The explicit dependence on past actions generates endogenous dynamics of the system. We, firstly, study under a rather general setting (risk attitudes, pricing rules and noises) the aggregate demand for the asset, the emerging returns and the structure of the equilibria of the asymptotic game. It is shown that multiple Nash equilibria may arise. Stability conditions are characterized, in particular boom and crash cycles are detected. Then we precisely analyze properties of equilibria under significant examples, performing comparative statics exercises and showing the stabilizing property of exogenous transaction costs.
|Date of creation:||Aug 2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +39 0412348721
Fax: +39 0412348701
Web page: http://www.unive.it/dip.management
More information through EDIRC
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.:
- Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Papers 0704.1348, arXiv.org, revised Mar 2009.
- Roger Guesnerie, 2001. "Assessing Rational Expectations: Sunspot Multiplicity and Economic Fluctuations," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262072076, June.
- Mirta B. Gordon & Jean-Pierre Nadal & Denis Phan & Viktoriya Semeshenko, 2007. "Discrete Choices under Social Influence: Generic Properties," Working Papers halshs-00135405, HAL.
- Rama Cont & Jean-Philippe Bouchaud, 1997. "Herd behavior and aggregate fluctuations in financial markets," Science & Finance (CFM) working paper archive 500028, Science & Finance, Capital Fund Management.
- Brock,W.A. & Durlauf,S.N., 2000.
"Discrete choice with social interactions,"
7, Wisconsin Madison - Social Systems.
- Follmer, Hans, 1974. "Random economies with many interacting agents," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 51-62, March.
- Guillaume Rocheteau & Pierre-Olivier Weill, 2011.
"Liquidity in frictional asset markets,"
1105, Federal Reserve Bank of Cleveland.
- 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.
- Blume,L. & Durlauf,S., 2002. "Equilibrium concepts for social interaction models," Working papers 7, Wisconsin Madison - Social Systems.
- Jean-Pierre Nadal & Denis Phan & Mirta Gordon & Jean Vannimenus, 2005. "Multiple equilibria in a monopoly market with heterogeneous agents and externalities," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 557-568.
- Hans Föllmer & Martin Schweizer, 1993. "A Microeconomic Approach to Diffusion Models For Stock Prices," Mathematical Finance, Wiley Blackwell, vol. 3(1), pages 1-23.
- Alessandro Citanna & John Donaldson & Herakles Polemarchakis & Paolo Siconolfi & Stephen Spear, 2004. "General equilibrium, incomplete markets and sunspots: A symposium in honor of David Cass," Economic Theory, Springer, vol. 24(3), pages 465-468, October.
- Thaler, Richard, 1981. "Some empirical evidence on dynamic inconsistency," Economics Letters, Elsevier, vol. 8(3), pages 201-207.
- Loewenstein, George & Prelec, Drazen, 1992. "Anomalies in Intertemporal Choice: Evidence and an Interpretation," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 573-97, May.
- Cont, Rama & Bouchaud, Jean-Philipe, 2000. "Herd Behavior And Aggregate Fluctuations In Financial Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 4(02), pages 170-196, June.
- Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, March.
- Chang, Sheng-Kai, 2007. "A simple asset pricing model with social interactions and heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1300-1325, April.
- 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.
When requesting a correction, please mention this item's handle: RePEc:vnm:wpdman:7. 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: (Marco LiCalzi)
If references are entirely missing, you can add them using this form.