Mesoscopic modelling of financial markets

TL;DR

This paper develops a mesoscopic model of financial markets based on kinetic theory, deriving a Fokker-Planck equation that predicts lognormal wealth distribution and validates it with numerical examples.

Contribution

It introduces a mesoscopic model derived from microscopic agent-based models using kinetic theory, linking wealth distribution to market dynamics.

Findings

The model predicts a self-similar lognormal wealth distribution.

Numerical simulations support the theoretical analysis.

The approach bridges microscopic and macroscopic descriptions of markets.

Abstract

We derive a mesoscopic description of the behavior of a simple financial market where the agents can create their own portfolio between two investment alternatives: a stock and a bond. The model is derived starting from the Levy-Levy-Solomon microscopic model (Econ. Lett., 45, (1994), 103--111) using the methods of kinetic theory and consists of a linear Boltzmann equation for the wealth distribution of the agents coupled with an equation for the price of the stock. From this model, under a suitable scaling, we derive a Fokker-Planck equation and show that the equation admits a self-similar lognormal behavior. Several numerical examples are also reported to validate our analysis.