Long-Run Heterogeneity in an Exchange Economy with Fixed-Mix Traders

44 Pages Posted: 20 Dec 2015

See all articles by Giulio Bottazzi

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Pietro Dindo

Ca Foscari University of Venice - Dipartimento di Economia

Daniele Giachini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM)

Date Written: November 16, 2015

Abstract

We consider an exchange economy with heterogeneous agents and multiple assets and investigate the coupled dynamics of assets’ prices and agents’ wealth. We assume that agents have heterogeneous beliefs and invest on each asset a fraction of wealth proportional to its expected dividends. Our main finding is that long-run coexistence of heterogeneous agents is a generic outcome of the market dynamics. We provide sufficient conditions for the latter, as well as sufficient conditions for the relative wealth of any given agent converging to zero or to one. Since we use a direct approach that combines the inter-temporal dynamics of wealth and prices via agents’ portfolio rules, we can characterize when long-run heterogeneity occurs for both complete and incomplete asset markets.

Keywords: Market Selection Hypothesis; Heterogeneous Beliefs; Evolutionary Finance; Incomplete Markets; Asset Pricing; Generalized Kelly rule.

JEL Classification: C60, D52, D53, G11, G12

Suggested Citation

Bottazzi, Giulio and Dindo, Pietro and Giachini, Daniele, Long-Run Heterogeneity in an Exchange Economy with Fixed-Mix Traders (November 16, 2015). Available at SSRN: https://ssrn.com/abstract=2705519 or http://dx.doi.org/10.2139/ssrn.2705519

Giulio Bottazzi

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy
+39-050-883343 (Phone)
+39-050-883344 (Fax)

Pietro Dindo (Contact Author)

Ca Foscari University of Venice - Dipartimento di Economia ( email )

Cannaregio 873
Venice, 30121
Italy

Daniele Giachini

Scuola Superiore Sant'Anna di Pisa - Laboratory of Economics and Management (LEM) ( email )

Piazza Martiri della Liberta, 33
Pisa, I-56127
Italy

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