Discussion Papers 2024

CIRJE-F-1228

"Mean Field Equilibrium Asset Pricing Model with Habit Formation"

Author Name

Fujii, Masaaki and Masashi Sekine

Date

May 2024

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Remarks

Abstract

This paper presents an asset pricing model in an incomplete market involving a large number of heterogeneous agents based on the mean field game theory. In the model, we incorporate habit formation in consumption preferences, which has been widely used to explain various phenomena in financial economics. In order to characterize the market-clearing equilibrium, we derive a quadratic-growth mean field backward stochastic differential equation (BSDE) and study its well-posedness and asymptotic behavior in the large population limit. Additionally, we introduce an exponential quadratic Gaussian reformulation of the asset pricing model, in which the solution is obtained in a semi-analytic form.

Keywords: mean field game, asset pricing, optimal consumption-investment problem, exponential utility, market clearing