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Condensed Matter Physics Seminar

2 p.m., Thursday, March 1, 2001

Room 4220, Physics Building
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* Statistical Equilibrium Issues in Economic Modeling*

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(Department of Economics, New School University, New York)

**Abstract:** Statistical equilibrium is a short-run, temporary
equilibrium model of market exchange which replaces the Walrasian picture
of the market in equilibrium as a budget hyperplane defined by equilibrium
relative prices with a scalar field of transactions probabilities.
Statistical equilibrium synthesizes the classical notion of competition
as a market with a large number of traders with the idea of liquidity limited
by traders' need to find actual counterpart transactors. From an
economic point of view statistical equilibrium is the feasible Pareto-improving
multilateral transaction that can be achieved in the largest number of
distinct ways. On the assumption that all Pareto-improving transactions
are equally likely, the statistical equilibrium can be characterized in
terms of entropy maximization as a Gibbs distribution in which the transaction
probability of any transaction is proportional to its value at equilibrium
absolute entropy prices. The statistical equilibrium approximates,
but does not in general achieve, Pareto-efficiency. A possible interpretation
of the statistical equilibrium is as the statistical outcome of a sequence
of identical repeated markets, in which the Gibbs probabilities are interpreted
as flows of transactions per unit time. The phenomenon of market
arbitrage is examined in the context of a simple model of an asset market,
in which the statistical fluctuations of outcomes in each period represent
shifts in the arbitrageur's capital position.
**Host:** Victor Yakovenko

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