Presentation of paper about the relationship between asset price volatility and wealth inequality. Through agent-based simulations, I find that increased asset price volatility can lead to increased wealth inequality through trading. Paper is available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3452599

1. Asset price volatility &
wealth inequality
Joeri Schasfoort
University of Cape Town

2. Asset price & inequality theory
Focussed on asset price level changes
(see e.g. Adam and Tzamourani, 2016)
•Asset price inflation increases inequality
•Asset price deflation decreases inequality

3. My contribution:
•Increased asset price volatility increases inequality.

4. How does volatility increase inequality?
•Through trading
•More price volatility → bigger profits & losses
•Over time: more traders hit lower wealth bound

5. How does volatility increase inequality?
•Traders who hit this lower bound are ‘out of the game’
•More volatility means more traders drop out.

6. Presentation overview
1. Two trader example
2. Agent-based model
1. Does trading move towards unequal steady state?
2. Does increased volatility increase speed to this state?

7. Two trader example
Every turn:
1. Random opposite expectations
2. One trader buys, the other sells
3. Random price realisation
4. Traders exit trade:
• 1 Trader has profit ∏,
• the other loss -∏.
Game stops if 1 trader cannot exit trade

8. Two trader example (1)
Trader 1 Wealth (W) over time (t)

9. Two trader example (2)
Increased volatility, game ends more quickly

10. Agent-Based Simulation questions:
In multi agent-setting:
1. Does trading tend towards unequal steady state
(SS)?
2. Does increased volatility increase speed to unequal
SS?

11. ABM structure
- Limit-orderbook market mechanism.
- Traders with money and risky asset.
- Noisy expectations.
- Portfolio balance behaviour.

12. ABM calibration
- Direct & indirect calibration
- MSM on autocorrelation returns
- Model produces near zero autocorrelation
returns
Parameter Value Source
Agents 1000 -
Sample size 10 -
Initial price 1101 S&P500
Initial stocks per
agent
81 Vanguard index shares
per agent
Risk aversion 0.7 Kim & Lee (2012)
Max spread 0.004 Riordan and
Storkenmaier (2012)
Horizon 100 Cella, Ellul, and Giannetti
(2013)
Volatility (of
expectations)
0:1953 MSM

13. Does trading tend towards unequal SS?

14. Does increased volatility increase speed to
unequal SS?
Unequal SS proxy: T_max if Gini > 0.8

15. Does increased volatility increase inequality?
eFast
Sensitivity analysis
Gini at T= 800

16. Conclusion
1. Pure trading (no other inputs / outputs) leads to inequality as more
and more traders hit lower wealth bound.
2. Increased volatility makes this happen faster. Thus increased
volatility leads to more wealth inequality.

17. Questions?
Abstract available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3452599
Slides available at: slideshare.net