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Financial crises and interacting heterogeneous agents

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  • Huang, Weihong
  • Zheng, Huanhuan
  • Chia, Wai-Mun

Abstract

In this paper we examine various types of financial crises and conjecture their underlying mechanisms using a deterministic heterogeneous agent model (HAM). In a market-maker framework, forward-looking investors update their price expectations according to psychological trading windows and cluster themselves strategically to optimize their expected profits. The switches between trading strategies lead to price dynamics in market that subsequently move price up and down, and in the extreme case, cause financial crises. The model suggests that both fundamentalists and chartists could potentially contribute to the financial crises.

Suggested Citation

  • Huang, Weihong & Zheng, Huanhuan & Chia, Wai-Mun, 2010. "Financial crises and interacting heterogeneous agents," Journal of Economic Dynamics and Control, Elsevier, vol. 34(6), pages 1105-1122, June.
    • Handle: RePEc:eee:dyncon:v:34:y:2010:i:6:p:1105-1122
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