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A Behavioral Foundation for Commonly Observed Distributions of Financial and Economic Data

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  • Keith Blackwell

Abstract

This paper introduces a simple symmetric Quantal Response Statistical Equilibrium (QRSE) model that can fit many commonly observed distributions of Economic and Financial data including Laplace, Gaussian, Logistic, and Student’s T distributions. This paper also introduces the application of QRSE to a financial market setting. A QRSE market model uses joint probability distribution of asset returns and entropy constrained buy/sell decisions of investors to explain stylized facts we commonly observe in the distributions of asset returns and economic data such as fat-tails, excess peakedness, and skew. Using the simplified model, this paper extends the existing logic and understanding of QRSE in order to provide a behavioral explanation for these commonly observed distributions of data.

Suggested Citation

  • Keith Blackwell, 2019. "A Behavioral Foundation for Commonly Observed Distributions of Financial and Economic Data," Working Papers 1912, New School for Social Research, Department of Economics.
    • Handle: RePEc:new:wpaper:1912
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    File URL: http://www.economicpolicyresearch.org/econ/2019/NSSR_WP_122019.pdf
    File Function: First version, 2019
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    Cited by:

    1. Benjamin Patrick Evans & Mikhail Prokopenko, 2021. "A maximum entropy model of bounded rational decision-making with prior beliefs and market feedback," Papers 2102.09180, arXiv.org, revised May 2021.

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