Market selection with learning and catching up with the Joneses

2011/06/15 by Roman Muraviev, Muraviev, Roman
Economics, Econometrics and Finance · Mathematics · #91B16 #91B69 #FOS: Economics and business #FOS: Mathematics #Optimization and Control (math.OC) #Portfolio Management (q-fin.PM) #math.OC #msc:91B16 #msc:91B69 #q-fin.PM

paper · pdf · doi:10.48550/arxiv.1106.3025

To appear in Finance and Stochastics

arxiv created 2012/01/15 · arxiv updated 2012/01/17

Abstract

We study the market selection hypothesis in complete financial markets, populated by heterogeneous agents. We allow for a rich structure of heterogeneity: individuals may differ in their beliefs concerning the economy, information and learning mechanism, risk aversion, impatience and 'catching up with Joneses' preferences. We develop new techniques for studying the long-run behavior of such economies, based on the Strassen's functional law of iterated logarithm. In particular, we explicitly determine an agent's survival index and show how the latter depends on the agent's characteristics. We use these results to study the long-run behavior of the equilibrium interest rate and the market price of risk.

Related

• Markets with Heterogeneous Agents: Dynamics and Survival of Bayesian vs. No-Regret Learners
• Adaptive beliefs and the volatility of asset prices
• Trader dynamics in a model market
• Nonlinear adaptive beliefs and the dynamics of financial markets. The role of the evolutionary fitness measure.
• Evolutionary dynamics in financial markets with heterogeneities in\n strategies and risk tolerance