2007/27 | LEM Working Paper Series | |
Wealth-driven Selection in a Financial Market with Heterogeneous Agents |
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Mikhail Anufriev and Pietro Dindo |
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Keywords | ||
Heterogeneous agents, Asset pricing model, Bounded rationality, CRRA
framework, Levy-Levy-Solomon model, Evolutionary Finance.
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JEL Classifications | ||
G12, D84, C62.
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Abstract | ||
We study the co-evolution of asset prices and individual wealth in a
financial market populated by an arbitrary number of heterogeneous
boundedly rational investors. Using wealth dynamics as a selection
device we are able to characterize the long run market outcomes,
i.e. asset returns and wealth distributions, for a general class of
investment behaviors. Our investigation illustrates that market
interaction and wealth dynamics pose certain limits on the outcome of
agents' interactions even within the ``wilderness of bounded
rationality''. As an application we consider the case of heterogenous
mean-variance optimizers and provide insights into the results of the
simulation model introduced in Levy, Levy and Solomon (1994).
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