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Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model

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  • Sunyoung Lee

    (Department of Economics, Seoul National University, Seoul, South Korea)

  • Keun Lee

    () (Department of Economics, Seoul National University, Seoul, South Korea)

Abstract

Background: The traditional economic models are increasingly perceived as weak in explaining the bubbles and crashes in financial markets and the associated crisis. Thus, especially after the global financial crisis in 2008, agent-based model (ABM) is getting an attention as an alternative approach for a better understanding of complex dynamics of financial market. Methods: This paper develops an ABM to replicate financial instability, such as bubbles and crashes in asset markets, by introducing a simple idea of ‘heterogeneous expectation’ and ‘herding behavior’ by which agents in different groups have different expectations about a ‘tipping point’ where they expect the price to stop rising anymore but to begins to fall. Results: It is shown that, when the agents have different expectations on the tipping point, the collapse of the price does not emerge automatically, and price fluctuations are often small and even some (seemingly) flat intervals appear. We also verify the impact of the herding behavior by dividing agents into several groups of varying sizes but with the same expectations. By changing the size of groups, we establish that the more agents share the same expectations about the tipping point, the higher volatility of the asset price emerges. Conclusions: We confirm that bubble and burst of prices are more like to emerge when heterogeneous expectations about prices are combined with herding behavior among agents, so that agents in the same group share the similar expectations about the price changes.

Suggested Citation

  • Sunyoung Lee & Keun Lee, 2015. "Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model," Journal of Open Innovation: Technology, Market, and Complexity, MDPI, Open Access Journal, vol. 1(1), pages 1-13, September.
  • Handle: RePEc:gam:joitmc:v:1:y:2015:i:1:p:12-:d:130764
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    References listed on IDEAS

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    1. D. COLANDER & al., 2010. "The Financial Crisis and the Systemic Failure of Academic Economics," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 6.
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    Cited by:

    1. Seung-Hee Lee & Jane E. Workman & Kwangho Jung, 2016. "Brand relationships and risk: influence of risk avoidance and gender on brand consumption," Journal of Open Innovation: Technology, Market, and Complexity, MDPI, Open Access Journal, vol. 2(3), pages 1-15, August.
    2. Sungyong Choi & KyungBae Park & Sang-Oh Shim, 2018. "Comparing validity of risk measures on newsvendor models in open innovation perspective," Journal of Open Innovation: Technology, Market, and Complexity, MDPI, Open Access Journal, vol. 4(1), pages 1-12, January.
    3. Jeong Hee Lee & Tae-Eung Sung & Eungdo Kim & Kwangsoo Shin, 2018. "Evaluating Determinant Priority of License Fee in Biotech Industry," Journal of Open Innovation: Technology, Market, and Complexity, MDPI, Open Access Journal, vol. 4(3), pages 1-22, August.

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    JEL classification:

    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics

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