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Market equilibria under procedural rationality

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  • Anufriev, Mikhail
  • Bottazzi, Giulio

Abstract

We analyze the endogenous price formation mechanism of a pure exchange economy with two assets, riskless and risky. The economy is populated by an arbitrarily large number of traders whose investment choices are described by means of generic smooth functions of past realizations. These choices can be consistent with (but not limited to) the solutions of expected utility maximization problems. Under the assumption that individual demand for the risky asset is expressed as a fraction of individual wealth, we derive a complete characterization of equilibria. It is shown that irrespectively of the number of agents and of their behavior, all possible equilibria belong to a one-dimensional "Equilibrium Market Curve". This geometric tool helps to illustrate the possibility of different phenomena, as multiple equilibria, and can be used for comparative static analysis. We discuss the relative performances of different strategies and the selection principle governing market dynamics on the basis of the stability analysis of equilibria.

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  • Anufriev, Mikhail & Bottazzi, Giulio, 2010. "Market equilibria under procedural rationality," Journal of Mathematical Economics, Elsevier, vol. 46(6), pages 1140-1172, November.
    • Handle: RePEc:eee:mateco:v:46:y:2010:i:6:p:1140-1172
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    Cited by:

    1. Bottazzi, Giulio & Dindo, Pietro, 2014. "Evolution and market behavior with endogenous investment rules," Journal of Economic Dynamics and Control, Elsevier, vol. 48(C), pages 121-146.
    2. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02312186, HAL.
    3. Laura Gardini & Noemi Schmitt & Iryna Sushko & Fabio Tramontana & Frank Westerhoff, 2019. "Necessary and sufficient conditions for the roots of a cubic polynomial and bifurcations of codimension-1, -2, -3 for 3D maps," Working Papers 1908, University of Urbino Carlo Bo, Department of Economics, Society & Politics - Scientific Committee - L. Stefanini & G. Travaglini, revised 2019.
    4. G. Dosi, 2012. "Economic Coordination and Dynamics: Some Elements of an Alternative “Evolutionary” Paradigm," Voprosy Ekonomiki, NP Voprosy Ekonomiki, issue 12.
    5. Giulio Bottazzi & Pietro Dindo, 2013. "Selection in asset markets: the good, the bad, and the unknown," Journal of Evolutionary Economics, Springer, vol. 23(3), pages 641-661, July.
    6. Anufriev, Mikhail & Dindo, Pietro, 2010. "Wealth-driven selection in a financial market with heterogeneous agents," Journal of Economic Behavior & Organization, Elsevier, vol. 73(3), pages 327-358, March.
    7. Guillaume Coqueret, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02000726, HAL.
    8. Anufriev, Mikhail & Bottazzi, Giulio & Marsili, Matteo & Pin, Paolo, 2012. "Excess covariance and dynamic instability in a multi-asset model," Journal of Economic Dynamics and Control, Elsevier, vol. 36(8), pages 1142-1161.
    9. Pietro Dindo & Jacopo Staccioli, 2017. "Asset prices and wealth dynamics in a financial market with endogenous liquidation risk," LEM Papers Series 2017/33, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    10. Coqueret, Guillaume, 2017. "Empirical properties of a heterogeneous agent model in large dimensions," Journal of Economic Dynamics and Control, Elsevier, vol. 77(C), pages 180-201.
    11. Mikhail Anufriev & Davide Radi & Fabio Tramontana, 2018. "Some reflections on past and future of nonlinear dynamics in economics and finance," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 41(2), pages 91-118, November.
    12. Guillaume Coqueret & Bertrand Tavin, 2019. "Procedural rationality, asset heterogeneity and market selection," Post-Print hal-02312310, HAL.
    13. Hirshleifer, David & Lo, Andrew W. & Zhang, Ruixun, 2023. "Social contagion and the survival of diverse investment styles," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    14. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    15. Coqueret, Guillaume & Tavin, Bertrand, 2019. "Procedural rationality, asset heterogeneity and market selection," Journal of Mathematical Economics, Elsevier, vol. 82(C), pages 125-149.
    16. Guillaume Coqueret, 2016. "Empirical properties of a heterogeneous agent model in large dimensions," Post-Print hal-02088097, HAL.

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