2007/27 LEM Working Paper Series

Wealth-driven Selection in a Financial Market with Heterogeneous Agents

Mikhail Anufriev and Pietro Dindo
Heterogeneous agents, Asset pricing model, Bounded rationality, CRRA framework, Levy-Levy-Solomon model, Evolutionary Finance.

  JEL Classifications
G12, D84, C62.

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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