Excess Covariance and Dynamic Instability in a Multi-Asset Model
speaker: Paolo Pin (Università di Siena)abstract: We propose a micro-founded model of financial markets with multiplicity of both (i) traded assets and (ii) traders' strategies in choosing and balancing portfolios. In this framework we study stationary equilibria where (even fully rational) heterogeneous Constant Relative Risk Averse strategies coexist and drive the evolution of the assets' prices. We show that in such equilibria excess covariance of the price movements arises, i.e. prices tend to be more correlated than their dividends (i.e. fundamentals, in this model) do. Moreover, we show that in any stationary equilibrium there is a positive expected profit in choosing more risky portfolios, and that a trend towards more remunerative strategies would increase the variance of prices.
timetable:
Sat 3 Oct, 12:30 - 13:30, Aula 3
documents:
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