Anufriev, Mikhail and Bottazzi, Giulio (2006) Price and wealth dynamics in a speculative market with generic procedurally rational traders. Working Paper. Warwick Business School, Financial Econometrics Research Centre, Coventry.

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Abstract

An agent-based model of a simple financial market with arbitrary number of traders having relatively general behavioral specifications is analyzed. In a pure exchange economy with two assets, riskless and risky, trading takes place in discrete time under endogenous price formation setting. Traders’ demands for the risky asset are expressed as fractions of their individual wealths, so that the dynamical system in terms of wealth and return is obtained. Agents’ choices, i.e. investment fractions, are described by means of the generic smooth functions of an infinite information set. The choices can be consistent with (but not limited to) the solutions of the expected utility maximization problems. A complete characterization of equilibria is given. It is shown that irrespectively of the number of agents and of their behavior, all possible equilibria belong to a one-dimensional “Equilibrium Market Line”. This geometric tool helps to illustrate possibility of different phenomena, like multiple equilibria, and also can be used for comparative static analysis. The stability conditions of equilibria are derived for general model specification and allow to discuss the relative performances of different strategies and the selection principle governing market dynamics.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory Q Science > QA Mathematics
Divisions:	Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH):	Assets (Accounting), Pricing -- Mathematical models, Rational expectations (Economic theory), Equilibrium (Economics), Economic stabilization
Series Name:	Working papers (Warwick Business School. Financial Econometrics Research Centre)
Publisher:	Warwick Business School, Financial Econometrics Research Centre
Place of Publication:	Coventry
Date:	February 2006
Number:	No.06-
Number of Pages:	47
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Sixth Framework Programme (European Commission) (FP6)
Grant number:	516446 (SFP)
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URI:	http://wrap.warwick.ac.uk/id/eprint/1766

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