A Peer-based Model of Fat-tailed Outcomes

2013/04/02 by Ben Klemens, Klemens, Ben
Economics, Econometrics and Finance · Mathematics · #FOS: Computer and information sciences #FOS: Economics and business #Other Statistics (stat.OT) #Trading and Market Microstructure (q-fin.TR) #q-fin.TR #stat.OT

paper · pdf · doi:10.48550/arxiv.1304.0718

arxiv created 2013/04/02 · arxiv updated 2013/04/03

Abstract

It is well known that the distribution of returns from various financial instruments are leptokurtic, meaning that the distributions have "fatter tails" than a Normal distribution, and have skew toward zero. This paper presents a graceful micro-level explanation for such fat-tailed outcomes, using agents whose private valuations have Normally-distributed errors, but whose utility function includes a term for the percentage of others who also buy.

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