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We study an agent-based stock market model with heterogeneous agents andfriction. Our model is based on that of Foellmer-Schweizer(1993): The processof a stock price in a discrete-time framework is determined by temporaryequilibria via agents' excess demand functions, and the diffusion approximationapproach is applied to characterize the continuous-time limit (as transactionintervals shorten) as a solution of the corresponding stochastic differentialequation (SDE). In this paper we further make the assumption that some of theagents are bound by either short sale constraints or budget constraints. Thenwe show that the continuous-time process of the stock price can be derived froma certain SDE with oblique reflection. Moreover we find that the short sale(respectively, budget) constraint causes overpricing (respectively,underpricing).

Stock Price Fluctuations in an Agent-Based Model with Market Liquidity