Inflation and Risky Investments

The paper uses a Walrasian two-period financial market model with informed and uninformed constant absolute risk averse (CARA) rational investors and noise traders. The investors allocate their initial wealth between risky assets and risk-free fiat money. The analysis concentrates on the effects of decreasing value of money, or inflation, on the rational investors’ behavior and the asset market. The main findings are the following: Inflation does not affect the informed investors’ prediction coefficient but makes that of the uninformed investors diminish. Inflation does not affect rational investors’ risk but makes the asset price more sensitive to fundament-based and sentiment-based shocks. Inflation changes the market price of the risky asset rise; while it has no effects on the informed investors’ demand of the risky asset, it does affect the uninformed investors’ demand. Finally, inflation makes the asset market more volatile.

Download Full-text

Leaning against the Bubble: Central Bank Intervention in Walrasian Asset Markets

Risks ◽

10.3390/risks9120214 ◽

2021 ◽

Vol 9 (12) ◽

pp. 214

Author(s):

Chia-Lin Chang ◽

Jukka Ilomäki ◽

Hannu Laurila

Keyword(s):

Central Bank ◽

Asset Price ◽

Market Price ◽

Market Model ◽

Asset Markets ◽

Central Bank Intervention ◽

Risky Assets ◽

Automatic Stabilizer ◽

Negative Effect ◽

Prediction Coefficient

The paper presents a two-period Walrasian financial market model composed of informed and uninformed rational investors, and noise traders. The rational investors maximize second period consumption utility from the payoffs of trading risk-free holdings to risky assets in the first period. The central bank reacts directly to asset price movements by selling or buying assets to stabilize the market price. It is found that the intervention makes the risky asset’s market price per share less sensitive to information shocks, which presses the market price towards its average price thus reducing price variance. The informed investors’ prediction coefficient remains unaffected, but that of the uninformed investors is magnified, which cancels out the negative effect on shock sensitivity thus keeping the expected value of the risky asset’s dividend constant. Finally, the introduction of the policy rule does not affect rational investors’ risk per share. A general conclusion is that the central bank’s policy can be regarded as an effective automatic stabilizer of financial markets.

Download Full-text

Stochastic sensitivity of bull and bear states

Journal of Economic Interaction and Coordination ◽

10.1007/s11403-020-00313-2 ◽

2021 ◽

Author(s):

Jochen Jungeilges ◽

Elena Maklakova ◽

Tatyana Perevalova

Keyword(s):

Additive Noise ◽

Asset Price ◽

Market Model ◽

Asset Market ◽

Stochastic Version ◽

Market Participants ◽

Price Process ◽

Stochastic Sensitivity ◽

Stable Equilibria ◽

Parametric Noise

AbstractWe study the price dynamics generated by a stochastic version of a Day–Huang type asset market model with heterogenous, interacting market participants. To facilitate the analysis, we introduce a methodology that allows us to assess the consequences of changes in uncertainty on the dynamics of an asset price process close to stable equilibria. In particular, we focus on noise-induced transitions between bull and bear states of the market under additive as well as parametric noise. Our results are obtained by combining the stochastic sensitivity function (SSF) approach, a mixture of analytical and numerical techniques, due to Mil’shtein and Ryashko (1995) with concepts and techniques from the study of non-smooth 1D maps. We find that the stochastic sensitivity of the respective bull and bear equilibria in the presence of additive noise is higher than under parametric noise. Thus, recurrent transitions are likely to be observed already for relatively low intensities of additive noise.

Download Full-text

STABILITY ANALYSIS WITH APPLICATIONS OF A TWO-DIMENSIONAL DYNAMICAL SYSTEM ARISING FROM A STOCHASTIC MODEL FOR AN ASSET MARKET

Stochastics and Dynamics ◽

10.1142/s0219493711003462 ◽

2011 ◽

Vol 11 (04) ◽

pp. 715-752

Author(s):

VLADIMIR BELITSKY ◽

ANTONIO LUIZ PEREIRA ◽

FERNANDO PIGEARD DE ALMEIDA PRADO

Keyword(s):

Dynamical System ◽

Dynamical Systems ◽

Asset Price ◽

Excess Demand ◽

Market Model ◽

Asset Market ◽

Two Dimensional ◽

Equilibrium Solutions ◽

Dimensional Dynamical System ◽

Demand Fluctuations

We analyze the stability properties of equilibrium solutions and periodicity of orbits in a two-dimensional dynamical system whose orbits mimic the evolution of the price of an asset and the excess demand for that asset. The construction of the system is grounded upon a heterogeneous interacting agent model for a single risky asset market. An advantage of this construction procedure is that the resulting dynamical system becomes a macroscopic market model which mirrors the market quantities and qualities that would typically be taken into account solely at the microscopic level of modeling. The system's parameters correspond to: (a) the proportion of speculators in a market; (b) the traders' speculative trend; (c) the degree of heterogeneity of idiosyncratic evaluations of the market agents with respect to the asset's fundamental value; and (d) the strength of the feedback of the population excess demand on the asset price update increment. This correspondence allows us to employ our results in order to infer plausible causes for the emergence of price and demand fluctuations in a real asset market. The employment of dynamical systems for studying evolution of stochastic models of socio-economic phenomena is quite usual in the area of heterogeneous interacting agent models. However, in the vast majority of the cases present in the literature, these dynamical systems are one-dimensional. Our work is among the few in the area that construct and study analytically a two-dimensional dynamical system and apply it for explanation of socio-economic phenomena.

Download Full-text

The Balance Sheet Effects and Macroeconomic Development in the Pacific Region

Asian Economic Papers ◽

10.1162/asep.2007.6.1.101 ◽

2007 ◽

Vol 6 (1) ◽

pp. 101-129

Author(s):

Akira Kohsaka ◽

Masahiro Enya

Keyword(s):

East Asia ◽

Structural Changes ◽

East Asian ◽

Asset Price ◽

Market Price ◽

Balance Sheet ◽

Asset Market ◽

Pacific Region ◽

Event Analysis ◽

The Pacific

This paper focuses on balance sheet adjustments across the recent boom–bust cycles in the Pacific region along with structural changes in sectoral balance sheets and policy environments. Comparing empirical regularities across industrial as well as East Asian countries over the past decades, our analysis shows that asset price busts and concurrent macroeconomic developments in East Asia share some common patterns, identified using event analysis, with industrial economies. Regarding the macroeconomic impact of asset market price busts, we generally observed qualitatively similar features between industrial countries and East Asian emerging markets. Major differences between the two groups appear in the magnitude of swings and the speed of recoveries of the key macroeconomic variables. Negative impacts on investment were stronger in East Asia, but quicker recoveries were their features, whereas private consumption was commonly rather robust to asset market turmoil.

Download Full-text

Media Frenzies in Markets for Financial Information

The American Economic Review ◽

10.1257/aer.96.3.577 ◽

2006 ◽

Vol 96 (3) ◽

pp. 577-601 ◽

Cited By ~ 170

Author(s):

Laura L Veldkamp

Keyword(s):

Media Coverage ◽

Price Dispersion ◽

Asset Price ◽

News Coverage ◽

Market Price ◽

Equity Markets ◽

High Volume ◽

Asset Market ◽

Fixed Costs ◽

High Information

Emerging equity markets witness occasional surges in prices (frenzies) and cross-market price dispersion (herds), accompanied by abundant media coverage. An information market complementarity can explain these anomalies. Because information has high fixed costs, high volume makes it inexpensive. Low prices induce investors to buy information that others buy. Given two identical assets, investors learn about one; abundant information reduces its payoff risk and raises its price. Transitions between low-information/low-asset-price and high-information/high-asset-price equilibria resemble frenzies. Equity data and new panel data on news coverage support the model's predictions: Asset market movements generate news and news raises prices and price dispersion.

Download Full-text

Dependence of Left-Skewed Payoff Distributions on Risky-Asset Price Uncertainty

SSRN Electronic Journal ◽

10.2139/ssrn.878561 ◽

2005 ◽

Cited By ~ 1

Author(s):

Jacek B. Krawczyk

Keyword(s):

Asset Price ◽

Risky Asset ◽

Price Uncertainty

Download Full-text

Cross-section instability in financial markets: impatience, extrapolation, and switching

Decisions in Economics and Finance ◽

10.1007/s10203-021-00348-5 ◽

2021 ◽

Author(s):

Roberto Dieci ◽

Xue-Zhong He

Keyword(s):

Financial Markets ◽

Cross Section ◽

Asset Price ◽

Asset Market ◽

Long Run ◽

Short Run ◽

And Performance ◽

Equilibrium Market ◽

High Degree ◽

Fundamental Price

AbstractThis paper presents a stylized model of interaction among boundedly rational heterogeneous agents in a multi-asset financial market to examine how agents’ impatience, extrapolation, and switching behaviors can affect cross-section market stability. Besides extrapolation and performance based switching between fundamental and extrapolative trading documented in single asset market, we show that a high degree of ‘impatience’ of agents who are ready to switch to more profitable trading strategy in the short run provides a further cross-section destabilizing mechanism. Though the ‘fundamental’ steady-state values, which reflect the standard present-value of the dividends, represent an unbiased equilibrium market outcome in the long run (to a certain extent), the price deviation from the fundamental price in one asset can spill-over to other assets, resulting in cross-section instability. Based on a (Neimark–Sacker) bifurcation analysis, we provide explicit conditions on how agents’ impatience, extrapolation, and switching can destabilize the market and result in a variety of short and long-run patterns for the cross-section asset price dynamics.

Download Full-text

Emergent volatility in asset markets with heterogeneous agents

Discrete Dynamics in Nature and Society ◽

10.1155/s1026022601000188 ◽

2001 ◽

Vol 6 (3) ◽

pp. 171-180 ◽

Cited By ~ 8

Author(s):

Honggang Li ◽

J. Barkley Rosser

Keyword(s):

Heterogeneous Agents ◽

Moving Average ◽

Asset Price ◽

Market Price ◽

Switching Behavior ◽

Asset Markets ◽

Technical Trading Rules ◽

Market Participants ◽

Fundamental Value ◽

Discrete Formulation

This paper examines the emergence of complex volatility in dynamic asset markets when there are heterogeneous agents. A discrete formulation is studied with two categories of market participants, fundamentalist traders who buy when the asset price is below the fundamental value and sell when it is above and noise traders who use moving average technical trading rules that can lead them to chase trends. Agents switch from one type of strategy to the other according to relative returns. A variety of outcomes are studied using numerical simulation, including variation of market price responsiveness to changes in excess demand, in switching behavior, and the introduction of noise. Bifurcation analysis of certain parameters is presented.

Download Full-text