Mean-Field Price Formation on Trees: with Multi-Population and Non-Rational Agents

Masaaki Fujii
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Masaaki Fujii: Graduate School of Economics, The University of Tokyo

No CARF-F-606, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: This work solves the equilibrium price formation problem for the risky stock by combining mean-field game theory with the binomial tree framework, following the classic approach of Cox, Ross & Rubinstein. For agents with exponential and recursive utilities of exponential-type, we prove the existence of a unique mean-field market-clearing equilibrium and derive an explicit analytic formula for equilibrium transition probabilities of the stock price on the binomial lattice. The agents face stochastic terminal liabilities and incremental endowments that depend on unhedgeable common and idiosyncratic factors, in addition to the stock price path. We also incorporate an external order flow. Furthermore, the analytic tractability of the proposed approach allows us to extend the framework in two important directions: First, we incorporate multi-population heterogeneity, allowing agents to differ in functional forms for their liabilities, endowments, and risk coefficients. Second, we relax the rational expectations hypothesis by modeling agents operating under subjective probability measures which induce stochastically biased views on the stock transition probabilities. Our numerical examples illustrate the qualitative effects of these components on the equilibrium price distribution.

Pages: 39
Date: 2025-10, Revised 2025-11
New Economics Papers: this item is included in nep-upt
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