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Background
Motivational Example
Generalizing via Agent-Based Modeling
Heber Farnsworth
1 Background
2 Motivational Example
Bayesian Equilibrium
Recall that the stochastic factor, H(t) gives the time t price
of any asset which pays cash flow ξ at T as
1
Et [ξH(T )]
H(t)
dH(t)
= −r (t)dt − θ(t)> dW (t)
H(t)
A Simple Example
subject to
"Z # "Z #
T T
E H(t)ck (t)dt = E H(t)wk δ(t)dt
0 0
1 −ρk t
ck (t) = e γk xk
H(t)
where
ρk
γk =
1 − e−ρk T
and xk is the total starting wealth of agents of type k .
By starting wealth we mean the value of the endowment
stream of this type
Aggregation
Investors know that this must hold but they don’t know the
xk
But their beliefs must be consistent with this market
clearing condition
1 X −ρk t
δ(t) = e γk Et [xk ]
H(t)
k
Updating
dYk (t)
= vk (t)> dW (t)
Yk (t)
Equilibrium
If all the ρk were the same and the vk were zero then we
would have the classical result
The Goal
and
θ(t) = θ0 + θ1> Y (t)
Updating
Consumption Choice
Xk (t)
ck (t) =
Gk (t, T )
where τ = T − t
The function C, D, and Q satisfy a particular set of ODEs
Investment Decision
Market Clearing
Open Questions