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Financial price fluctuations in a stock market model with many interacting agents

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  • Ulrich Horst

Abstract

We consider a financial market model with a large number of interacting agents. Investors are heterogeneous in their expectations about the future evolution of an asset price process. Their current expectation is based on the previous states of their “neighbors” and on a random signal about the “mood of the market.” We analyze the asymptotics of both aggregate behavior and asset prices. We give sufficient conditions for the distribution of equilibrium prices to converge to a unique equilibrium, and provide a microeconomic foundation for the use of diffusion models in the analysis of financial price fluctuations. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Ulrich Horst, 2005. "Financial price fluctuations in a stock market model with many interacting agents," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(4), pages 917-932, June.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:4:p:917-932
    DOI: 10.1007/s00199-004-0500-x
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