Noisy Trading in the Large Market Limit

  • Mikhail Anufriev
  • Giulio Bottazzi
Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 564)

Summary

This paper analyzes to what extent and how the trading activity of a group of heterogeneous agents can be described, in the aggregate, as the result of the investment decision of a single “representative” agent. We consider a two-asset pure exchange economy populated by CRRA traders whose individual demands are functions of the past market history. If individual choices are expressed as noisy versions of a common behavior, and the number of agents is large, one can consider the Large Market Limit of the economy and reduce the model to a low-dimensional stochastic system. We investigate the goodness of this approximation under different market conditions and different agents ecologies. The results of the analysis can be used in the study of the general case with an arbitrary number of heterogeneous agents.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. 1.
    Anufriev M, Bottazzi G, Pancotto F (2004) Price and wealth asymptotic dynamics with CRRA technical trading strategies. LEM Working Paper 2004/23, Scuola Superiore Sant’Anna, PisaGoogle Scholar
  2. 2.
    Anufriev M, Bottazzi G (2005) Price and wealth dynamics in a speculative market with an arbitrary number of generic technical traders. LEM Working Paper 2005/06, Scuola Superiore Sant’Anna, PisaGoogle Scholar
  3. 3.
    Chiarella C, He X (2001) Asset price and wealth dynamics under heterogeneous expectations. Quantitative Finance 1:509–526MathSciNetCrossRefGoogle Scholar
  4. 4.
    Form M, Lippi M (1998) Aggregation and the microfoundations of dynamic macroeconomics. Oxford University Press, OxfordGoogle Scholar
  5. 5.
    Gallegati M, Kirman A (1999) Beyond the Representative Agent. Edward Elgar, OxfordGoogle Scholar
  6. 6.
    Hommes CH (2005) Heterogeneous agents models in economics and finance. In: Judd K, Tesfatsion L (eds) Handbook of Computational Economics II: Agent-Based Computational Economics. Elsevier, North-Holland (forthcoming)Google Scholar
  7. 7.
    Kirman A (1992) Whom or what does the representative agent represent? Journal of Economic Perspectives 6:117–136Google Scholar
  8. 8.
    LeBaron B (2000) Agent-based computational finance: suggested readings and early research. Journal of Economic Dynamics and Control 24:679–702MATHCrossRefGoogle Scholar
  9. 9.
    Levy M, Levy H and Solomon S (2000) Microscopic simulation of financial markets. Academic Press, London.Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg 2006

Authors and Affiliations

  • Mikhail Anufriev
    • 1
  • Giulio Bottazzi
    • 2
  1. 1.S.Anna School for Advanced StudiesPisa
  2. 2.S.Anna School for Advanced StudiesPisa

Personalised recommendations