Ab initio simulation of market dynamics

TL;DR

This paper introduces a simulation framework for market dynamics using simple models of actor utility and market rules, capturing price fluctuations and stability conditions.

Contribution

It presents a novel simulation approach that models rational actor behavior and market interactions, extending beyond traditional price-demand analyses.

Findings

Stable prices require actors to have time-preference.

Price fluctuations exhibit algebraic tail distributions.

Inflation expectations can cause complex price oscillations.

Abstract

We provide simple models for the utility function (or psychology) of an actor trading a multitude of goods for money. In this framework, money has no intrinsic consumption value, but is required as a medium of exchange. A collection of such actors are then simulated interacting through market rules which create a double auction for each of the goods. This framework captures the self-consistent, rational behavior of independent actors, including how they make compromises between purchases of different goods; so goes beyond price-demand curves, and also generates the small-scale fluctuations from individual trades. We find that stable price formation requires a model that includes time-preference for the actors. Fluctuations in prices show a distribution with algebraic tails. Including inflation expectations leads to complex, damped or un-damped price oscillations. We attempt to model the dynamics of input-output economic models, but find it difficult to keep prices stable with the assumptions employed.