2016/13 | LEM Working Paper Series | ||||||||||||||||
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Wealth and Price Distribution by Diffusive Approximation in a Repeated Prediction Market |
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Giulio Bottazzi and Daniele Giachini |
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Keywords | |||||||||||||||||
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Prediction Markets, Heterogeneous Beliefs, Fractional Kelly Rule, Invariant Distribution, Diffusive Approximation, Fokker Planck Equation
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JEL Classifications | |||||||||||||||||
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C60, D53, G11, G12
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Abstract | |||||||||||||||||
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The approximate agents' wealth and price invariant densities of a
repeated prediction market model is derived using the Fokker-Planck
equation of the associated continuous-time jump process. We show
that the approximation obtained from the evolution of log-wealth
difference can be reliably exploited to compute all the quantities
of interest in all the acceptable parameter space. When the risk
aversion of the trader is high enough, we are able to derive an
explicit closed-form solution for the price distribution which is
asymptotically correct.
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