Exponential Quadratic Gaussian Asset Pricing Model with Partial Observation and Mean Field Equilibrium

핵심 개념

The paper studies an asset pricing model in a partially observable market with a large number of heterogeneous agents using mean field game theory. It characterizes the equilibrium risk premium through a solution to a mean field backward stochastic differential equation (BSDE) and constructs the risk premium process endogenously using Kalman-Bucy filtering.

초록

The paper presents an asset pricing model in a partially observable market with a large number of heterogeneous agents. The key aspects are:

1. Market Setup:

   • The market has d0 non-dividend paying risky stocks with price dynamics following a stochastic differential equation.
   • Agents can only observe the stock prices but cannot directly observe the risk premium process.
   • The available market information for agents is modeled by the filtration G0 generated by the stock price process.

2. Optimal Investment Problem:

   • Each agent aims to maximize the expected utility of their terminal wealth, which is modeled using exponential utility.
   • The agents' trading strategies are G0-progressively measurable processes.
   • The optimal strategy for each agent is characterized by solving a backward stochastic differential equation (BSDE).

3. Mean Field Equilibrium:

   • The paper derives a mean field BSDE that characterizes the equilibrium risk premium process.
   • By associating the mean field BSDE with a system of ordinary differential equations (ODEs), the authors show that the solution of the BSDE admits a semi-explicit form.
   • The solution of the mean field BSDE is used to construct the risk premium process endogenously under the Kalman-Bucy filtering framework.

4. Numerical Simulation:

   • The paper includes a simple numerical simulation to visualize the dynamics of the market model.

The key contributions of the paper are:

1. Extending the previous work on mean field equilibrium asset pricing to the case of partial observation.
2. Deriving a semi-explicit solution for the mean field BSDE by employing an exponential quadratic Gaussian framework.
3. Constructing the risk premium process endogenously using the Kalman-Bucy filtering theory.

통계

None.

인용구

None.

핵심 통찰 요약

Mean field equilibrium asset pricing model under partial observation: An exponential quadratic Gaussian approach

by Masashi Seki... 게시일 arxiv.org 10-03-2024

https://arxiv.org/pdf/2410.01352.pdf

더 깊은 질문

What are the potential implications of the partially observable market assumption on the behavior and strategies of the heterogeneous agents?

The assumption of a partially observable market significantly impacts the behavior and strategies of heterogeneous agents. In such a market, agents can only observe stock prices and must infer the underlying risk premium from these observations. This limitation leads to several implications:

Informed vs. Uninformed Trading: Agents may develop different trading strategies based on their ability to interpret price signals. Those who are more adept at inferring the risk premium from price movements may engage in more aggressive trading strategies, while less informed agents may adopt more conservative approaches, leading to a divergence in trading behaviors.

Heterogeneity in Expectations: Given that agents have different levels of information and interpret price signals differently, this can result in heterogeneous expectations regarding future price movements and risk premiums. This diversity can lead to increased market volatility as agents react differently to the same observable information.

Adaptive Strategies: Agents may employ adaptive strategies, adjusting their trading behavior based on past price movements and their inferred risk premiums. This could lead to feedback loops where price movements influence trading strategies, which in turn affect future price movements.

Market Inefficiencies: The inability to observe the true risk premium can result in mispricing of assets, as agents may base their decisions on incorrect inferences. This mispricing can create opportunities for arbitrage, but it can also lead to prolonged periods of inefficiency in the market.

Risk Management: Agents may place greater emphasis on risk management techniques, such as diversification and hedging, to mitigate the uncertainty stemming from their inability to fully observe market conditions. This could lead to a more cautious approach to investment, impacting overall market dynamics.

How would the results change if the agents had different utility functions or risk preferences, rather than the assumed exponential utility?

If agents had different utility functions or risk preferences, the results of the model would be significantly altered in several ways:

Diverse Risk Aversion: Different utility functions would imply varying degrees of risk aversion among agents. For instance, some agents might exhibit increasing risk aversion, while others might be risk-seeking. This diversity would lead to a wider range of trading strategies and potentially more complex interactions in the market.

Impact on Equilibrium Risk Premium: The equilibrium risk premium derived from the model would likely change, as it would need to account for the varying risk preferences of agents. The aggregation of individual risk preferences would influence the overall market risk premium, potentially leading to a more nuanced understanding of how risk is priced in the market.

Strategic Interactions: The interactions among agents would become more intricate, as agents with different utility functions might respond differently to the same market signals. This could lead to a richer set of equilibria, as agents optimize their strategies based on their unique preferences.

Market Dynamics: The presence of diverse utility functions could lead to more pronounced market dynamics, including fluctuations in asset prices driven by the differing reactions of agents to observable information. This could result in increased volatility and the potential for market bubbles or crashes.

Complexity in Modeling: The mathematical complexity of the model would increase, as the analysis would need to incorporate a broader class of utility functions. This could complicate the derivation of equilibrium conditions and the characterization of optimal strategies.

Can the proposed framework be extended to incorporate more realistic features of financial markets, such as transaction costs, market frictions, or the presence of informed and uninformed traders?

Yes, the proposed framework can be extended to incorporate more realistic features of financial markets, enhancing its applicability and relevance. Here are several ways to achieve this:

Transaction Costs: Introducing transaction costs into the model would require agents to consider the costs associated with trading when formulating their strategies. This could lead to less frequent trading and a focus on long-term investment strategies, as agents would need to weigh the benefits of trading against the costs incurred.

Market Frictions: Incorporating market frictions, such as liquidity constraints or restrictions on short-selling, would affect the agents' ability to execute their trading strategies. This could lead to a more cautious approach to trading and impact the overall market dynamics, potentially resulting in increased price volatility.

Informed vs. Uninformed Traders: The framework could be adapted to include a distinction between informed and uninformed traders. Informed traders would have access to additional information that allows them to make more accurate inferences about the risk premium, while uninformed traders would rely solely on observable prices. This differentiation could lead to a richer set of interactions and a more complex market equilibrium.

Behavioral Aspects: The model could also incorporate behavioral finance elements, such as overconfidence or herding behavior, which could influence trading decisions and market outcomes. This would provide a more comprehensive understanding of how psychological factors impact market dynamics.

Dynamic Adjustments: Allowing for dynamic adjustments in trading strategies in response to changing market conditions and the actions of other agents would enhance the realism of the model. This could involve incorporating adaptive learning mechanisms where agents update their beliefs and strategies based on past performance and observed market behavior.

By integrating these features, the framework would better reflect the complexities of real-world financial markets, providing deeper insights into asset pricing and the behavior of heterogeneous agents under partial observation.