Stock Market Volatility & Wealth Inequality

Abstract

This paper explores how volatility in stock markets affects wealth inequality. Theoretically, volatility increases wealth inequality because it increases the heterogeneity of log returns more at the top of the wealth distribution than at the bottom. I test this hypothesis in an agent-based financial market model. The model contains white noise traders that are also heterogeneous with regards to their holdings of money and stocks. Simulations confirm that wealthy agents tend to have more volatile log returns than poor agents. I construct a Monte Carlo simulation experiment in which price volatility is gradually increased. The result is that volatility leads to both increased heterogeneity of log returns and wealth inequality.

Keywords: agent-based modelling, financial markets, trading, inequality

JEL Classification: G12, D63