Economics, Econometrics and Finance
4 years ago

New market equilibrium model reveals key to predicting stock market behavior.

Computing in Economics and Finance
Behavioral Consistent Market Equilibria under Procedural Rationality
Mikhail Anufriev, Giulio Bottazzi

Paper Summary

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The article analyzes how investors make decisions in a dynamic asset pricing model. They propose the concept of Behavioral Consistent Equilibria (BCE) where investors' choices align with the overall market dynamics. The Equilibrium Market Line (EML) helps separate the impact of dividend processes and investor behaviors on market outcomes. The shape of the EML is influenced by dividend processes, but the actual equilibrium point is determined by how investors behave. BCE is a broader version of Rational Expectations Equilibrium, useful for studying how different strategies perform in a diverse market.