Mean-Field Price Formation on Trees with a Network of Relative Performance Concerns

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

No CARF-F-615, CARF F-Series from Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo

Abstract: Financial firms and institutional investors are routinely evaluated based on their performance relative to their peers. These relative performance concerns significantly influence risk-taking behavior and market dynamics. While the literature studying Nash equilibrium under such relative performance competitions is extensive, its effect on asset price formation remains largely unexplored. This paper investigates mean-field equilibrium price formation of a single risky stock in a discrete-time market where agents exhibit exponential utility and relative performance concerns. Unlike existing literature that typically treats asset prices as exogenous, we impose a market-clearing condition to determine the price dynamics endogenously within a relative performance equilibrium. Using a binomial tree framework, we establish the existence and uniqueness of the market-clearing mean-field equilibrium in both single- and multi-population settings. Finally, we provide illustrative numerical examples demonstrating the equilibrium price distributions and agents' optimal position sizes.

Pages: 44
Date: 2026-01
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