Market Equilibria under Procedural Rationality

Mikhail Anufriev and Giulio Bottazzi

No 09-11, CeNDEF Working Papers from Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance

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.

Date: 2009
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Journal Article: Market equilibria under procedural rationality (2010)
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