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Interacting Agents in Finance

Author

Listed:
  • Cars Hommes

    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

Abstract

This discussion paper led to a chapter in: (S.N. Durlauf & L.E. Blume (Eds.)) The New Palgrave Dictionary of Economics 2nd ed. Vol.4, pp. 402-406. Basingstoke: Palgrave Macmillan, 2008. Interacting agents in finance represent a behavioral, agent-based approach in which financial markets are viewed as complex adaptive systems consisting of many boundedly rational agents interacting through simple heterogeneous investment strategies, constantly adapting their behavior in response to new information, strategy performance and through social interactions. An interacting agent system acts as a noise filter, transforming and amplifying purely random news about economic fundamentals into an aggregate market outcome exhibiting important stylized facts such as unpredictable asset prices and returns, excess volatility, temporary bubbles and sudden crashes, large and persistent trading volume, clustered volatility and long memory.

Suggested Citation

  • Cars Hommes, 2006. "Interacting Agents in Finance," Tinbergen Institute Discussion Papers 06-029/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20060029
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    File URL: https://papers.tinbergen.nl/06029.pdf
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis.
    2. Arvid Oskar Ivar Hoffmann & Wander Jager & J. H. Von Eije, 2007. "Social Simulation of Stock Markets: Taking It to the Next Level," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 10(2), pages 1-7.

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    More about this item

    Keywords

    heterogeneous agents; behavioral finance; bounded rationality; complexity;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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