Short-time behaviour of demand and price viewed through an exactly solvable model for heterogeneous interacting market agents

TL;DR

This paper presents an exactly solvable stochastic model for short-term asset market dynamics, capturing how social interactions and individual heterogeneity influence price fluctuations and demand behavior.

Contribution

It introduces a novel analytically tractable model combining social influence and heterogeneous fundamentalist trading, elucidating the origins of various price patterns.

Findings

Price oscillations can emerge from agent interactions.

The model predicts monotonic and single-bounce price behaviors.

Results are robust across different peer network structures.

Abstract

We introduce a stochastic heterogeneous interacting-agent model for the short-time non-equilibrium evolution of excess demand and price in a stylized asset market. We consider a combination of social interaction within peer groups and individually heterogeneous fundamentalist trading decisions which take into account the market price and the perceived fundamental value of the asset. The resulting excess demand is coupled to the market price. Rigorous analysis reveals that this feedback may lead to price oscillations, a single bounce, or monotonic price behaviour. The model is a rare example of an analytically tractable interacting-agent model which allows us to deduce in detail the origin of these different collective patterns. For a natural choice of initial distribution the results are independent of the graph structure that models the peer network of agents whose decisions influence each other.