Relative wealth concerns, positive feedback, and financial fluctuation
Authored by Joohyun Kim, Duk Hee Lee
Date Published: 2017
DOI: 10.1057/s41273-016-0005-1
Sponsors:
Korean National Research Foundation (NRF)
Platforms:
No platforms listed
Model Documentation:
Other Narrative
Mathematical description
Model Code URLs:
Model code not found
Abstract
Recent studies have shown that imitation and adaptation are the dominant
mechanisms of a positive feedback loop that leads to a dramatic
amplification of stock prices. In this research, relative wealth
concerns have been taken into account as the primary origin of the
positive feedback effect. Specifically, relative wealth concerns
alongside wealth inequality would change the risk attitude of each
stock-trading agent to catch up with their peers' wealth, by imitating
and adapting their trading strategies. We simulate an artificial stock
market via an agent-based modeling approach, which allows us to observe
what happens to each agent's relationships, providing a more insightful
view than the traditional economic model. This research demonstrates how
relative wealth concerns can affect today's financial mechanism, by
means of positive feedback effects.
Tags
Wealth inequality
herd behavior
Model
Power-law
Heterogeneous agents
Markets
Relative wealth concerns
Positive feedback effect
Risk attitude