Wealth Selection In A Financial Market With Heterogeneous Agents
Source: University of Amsterdam
The authors study the co-evolution of asset prices and agents' wealth in a financial market populated by an arbitrary number of heterogeneous, boundedly rational investors. They model assets' demand to be proportional to agents' wealth, so that wealth dynamics can be used as a selection device. For a general class of investment behaviors, they are able to characterize the long run market outcome, i.e. the steady-state equilibrium values of asset return, and agents' survival. Their investigation illustrates that market forces pose certain limits on the outcome of agents' interactions even within the "Wilderness of bounded rationality".