The presence of excess covariance in financial price returns is an accepted empirical fact: the price dynamics of financial assets tend to be more correlated than their fundamentals would justify. We advance an explanation of this fact based on an intertemporal equilibrium multi-assets model of financial markets with an explicit and endogenous price dynamics. The market is driven by an exogenous stochastic process of dividend yields paid by the assets that we identify as market fundamentals. The model is rather flexible and allows for the coexistence of different trading strategies. The evolution of assets price and traders' wealth is described by a high-dimensional stochastic dynamical system. We identify the equilibria of the model consistent with a baseline assumption of procedural rationality. We show that these equilibria are characterized by excess covariance in prices with respect to the dividend process. Moreover, we show that in equilibrium there is a positive expected marginal profit in choosing more risky portfolios. As a consequence, the evolutionary pressure generates a trend towards more remunerative strategies, which, in turn, increase the variance of prices and the dynamic instability of the system.

Anufriev, M., Bottazzi, G., Marsili, M., Pin, P. (2012). Excess covariance and dynamic instability in a multi-asset model. JOURNAL OF ECONOMIC DYNAMICS & CONTROL, 36(8), 1142-1161 [10.1016/j.jedc.2012.03.015].

Excess covariance and dynamic instability in a multi-asset model

PIN, PAOLO
2012-01-01

Abstract

The presence of excess covariance in financial price returns is an accepted empirical fact: the price dynamics of financial assets tend to be more correlated than their fundamentals would justify. We advance an explanation of this fact based on an intertemporal equilibrium multi-assets model of financial markets with an explicit and endogenous price dynamics. The market is driven by an exogenous stochastic process of dividend yields paid by the assets that we identify as market fundamentals. The model is rather flexible and allows for the coexistence of different trading strategies. The evolution of assets price and traders' wealth is described by a high-dimensional stochastic dynamical system. We identify the equilibria of the model consistent with a baseline assumption of procedural rationality. We show that these equilibria are characterized by excess covariance in prices with respect to the dividend process. Moreover, we show that in equilibrium there is a positive expected marginal profit in choosing more risky portfolios. As a consequence, the evolutionary pressure generates a trend towards more remunerative strategies, which, in turn, increase the variance of prices and the dynamic instability of the system.
2012
Anufriev, M., Bottazzi, G., Marsili, M., Pin, P. (2012). Excess covariance and dynamic instability in a multi-asset model. JOURNAL OF ECONOMIC DYNAMICS & CONTROL, 36(8), 1142-1161 [10.1016/j.jedc.2012.03.015].
File in questo prodotto:
File Dimensione Formato  
JEDC-2012.pdf

non disponibili

Tipologia: Post-print
Licenza: NON PUBBLICO - Accesso privato/ristretto
Dimensione 372.08 kB
Formato Adobe PDF
372.08 kB Adobe PDF   Visualizza/Apri   Richiedi una copia

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11365/37193
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo