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

This work solves the equilibrium price formation problem for the risky stock by combining mean-field game theory with the binomial tree framework, adapting 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.

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Publication Details

Journal
Asia-Pacific Financial Markets
Published
2026-07-23
DOI
https://doi.org/10.1007/s10690-026-09627-w
Primary Topic
Stochastic processes and financial applications
Type
article
Field-Weighted Citation Impact
0.00

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article

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

Masaaki Fujii
Asia-Pacific Financial Markets
Stochastic processes and financial applications
article

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

Masaaki Fujii
article en

Abstract

This work solves the equilibrium price formation problem for the risky stock by combining mean-field game theory with the binomial tree framework, adapting 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.

Asia-Pacific Financial Markets
The University of Tokyo (JP)
University of Tokyo
Openalex Percentile: Top 98%
Stochastic processes and financial applications
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