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Heterogeneous Agent Models: Two Simple Case Studies

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  • Cars Hommes

    (Faculty of Economics and Econometrics, Universiteit van Amsterdam)

Abstract

These notes review two simple heterogeneous agent models in economics and finance. The first is a cobweb model with rational versus naive agents introduced in Brock and Hommes (1997). The second is an asset pricing model with fundamentalists versus technical traders introduced in Brock and Hommes (1998). Agents are boundedly rational and switch between different trading strategies, based upon an evolutionary fitness measure given by realized past profits. Evolutionary switching creates a nonlinearity in the dynamics. Rational routes to randomness, that is, bifurcation routes to complicated dynamical behaviour occur when agents become more sensitive to differences in evolutionary fitness.

Suggested Citation

  • Cars Hommes, 2005. "Heterogeneous Agent Models: Two Simple Case Studies," Tinbergen Institute Discussion Papers 05-055/1, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20050055
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    File URL: https://papers.tinbergen.nl/05055.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    interacting agents; complex adaptive systems; evolutionary dynamics; bounded rationality; nonlinear dynamics; bifurcations and chaos.;
    All these keywords.

    JEL classification:

    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • C0 - Mathematical and Quantitative Methods - - General
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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