Simulating Heterogeneous Portfolio Choices and Financial Market Outcomes

Publikation: Bidrag til bog/antologi/rapportKonferencebidrag i proceedingsForskning

  • Sebastian Benthall
  • Christopher D. Carroll
  • Zachary David
  • John Liechty
  • Alan Lujan
  • Christopher McComb
  • Skar-Gislinge, Nicholas

Explaining the causes of financial crises requires relaxing some of the assumptions traditionally made by macroeconomic theory. We are able to simulate market crashes when consumer households have heterogeneous expectations of asset prices. These consumers earn, consume, and allocate their savings to either a risky or risk-free asset. As a departure from most macroeconomic models, the price of the risky asset is determined by a realistic agent-based simulation of a stock market, rather than through an idealized frictionless market model. Only a subset of agents in the market, the institutional investors, price the asset according to a rational expectations strategy based on an observed signal of the asset’s fundamental value. The consumers try to infer this fundamental value from the noisy price signal under bounded rationality conditions that limit their memory of and access to the price process. The consumers pass all of their buy and sell orders to the market in aggregate through a broker. This dynamic process of strategic interaction between heterogeneous macroeconomic agents and the agent-based financial market determines a new equilibrium price. We find that when the consumers have enough market power to overwhelm the institutional investors, the market will fail by driving the price of the risky asset to zero. This shows how one form of bounded rationality – ignorance about fundamental asset value – can contribute to financial crises. We also find that increasing the consumer market power leads to an increase in volatility (and a decrease in the price) of the risky asset. This suggests that there is an asymmetry whereby consumption dampens asset bubbles while accelerating price collapses.

Titel2nd Workshop on Agent-Based Modeling and Policy-Making
StatusUdgivet - 2023
Begivenhed2nd Workshop on Agent-Based Modeling and Policy-Making, AMPM 2022 - Saarbrucken, Tyskland
Varighed: 14 dec. 2022 → …


Konference2nd Workshop on Agent-Based Modeling and Policy-Making, AMPM 2022
Periode14/12/2022 → …
NavnCEUR Workshop Proceedings

Bibliografisk note

Funding Information:
This material is based upon work supported by the Defense Advanced Research Projects Agency through cooperative agreement No. HR001 12220029 and the National Science Foundation under Grant No. 2105301. Any opinions, findings, and conclusions or recommendations expressed in this paper are those of the authors and do not necessarily reflect the views of the sponsors. One of the authors of this article was supported by the New York University Information Law Institute’s Fellows program, which is funded in part by Microsoft Corporation.

Publisher Copyright:
© 2023 Copyright for this paper by its authors.

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