IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2503.00320.html
   My bibliography  Save this paper

Shifting Power: Leveraging LLMs to Simulate Human Aversion in ABMs of Bilateral Financial Exchanges, A bond market study

Author

Listed:
  • Alicia Vidler
  • Toby Walsh

Abstract

Bilateral markets, such as those for government bonds, involve decentralized and opaque transactions between market makers (MMs) and clients, posing significant challenges for traditional modeling approaches. To address these complexities, we introduce TRIBE an agent-based model augmented with a large language model (LLM) to simulate human-like decision-making in trading environments. TRIBE leverages publicly available data and stylized facts to capture realistic trading dynamics, integrating human biases like risk aversion and ambiguity sensitivity into the decision-making processes of agents. Our research yields three key contributions: first, we demonstrate that integrating LLMs into agent-based models to enhance client agency is feasible and enriches the simulation of agent behaviors in complex markets; second, we find that even slight trade aversion encoded within the LLM leads to a complete cessation of trading activity, highlighting the sensitivity of market dynamics to agents' risk profiles; third, we show that incorporating human-like variability shifts power dynamics towards clients and can disproportionately affect the entire system, often resulting in systemic agent collapse across simulations. These findings underscore the emergent properties that arise when introducing stochastic, human-like decision processes, revealing new system behaviors that enhance the realism and complexity of artificial societies.

Suggested Citation

  • Alicia Vidler & Toby Walsh, 2025. "Shifting Power: Leveraging LLMs to Simulate Human Aversion in ABMs of Bilateral Financial Exchanges, A bond market study," Papers 2503.00320, arXiv.org, revised Mar 2025.
  • Handle: RePEc:arx:papers:2503.00320
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2503.00320
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    2. Paulin, James & Calinescu, Anisoara & Wooldridge, Michael, 2019. "Understanding flash crash contagion and systemic risk: A micro–macro agent-based approach," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 200-229.
    3. Massa, Massimo & Simonov, Andrei, 2003. "Reputation and interdealer trading: a microstructure analysis of the Treasury Bond market," Journal of Financial Markets, Elsevier, vol. 6(2), pages 99-141, April.
    4. Jean-David Fermanian & Olivier Guéant & Jiang Pu, 2016. "The behavior of dealers and clients on the European corporate bond market: the case of Multi-Dealer-to-Client platforms," Working Papers 2016-34, Center for Research in Economics and Statistics.
    5. Alain P. Chaboud & Caren Cox & Michael J. Fleming & Ellen Correia Golay & Yesol Huh & Frank M. Keane & Kyle Lee & Krista B. Schwarz & Clara Vega & Carolyn Windover, 2025. "All-to-All Trading in the U.S. Treasury Market," Economic Policy Review, Federal Reserve Bank of New York, vol. 31(2), pages 1-27, February.
    6. Jon Cheshire, 2015. "Market Making in Bond Markets," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 63-74, March.
    7. Peter Bossaerts & Paolo Ghirardato & Serena Guarnaschelli & William R. Zame, 2010. "Ambiguity in Asset Markets: Theory and Experiment," The Review of Financial Studies, Society for Financial Studies, vol. 23(4), pages 1325-1359, April.
    8. Jose Varghese & Manoj Edward, 2018. "Relationship Between Job Orientation and Performance of Sales People: A Financial Services Industry Perspective," IIM Kozhikode Society & Management Review, , vol. 7(1), pages 88-96, January.
    9. Gabor Pinter & Chaojun Wang & Junyuan Zou, 2024. "Size Discount and Size Penalty: Trading Costs in Bond Markets," The Review of Financial Studies, Society for Financial Studies, vol. 37(7), pages 2156-2190.
    10. Rama Cont & Marvin S. Mueller, 2019. "A stochastic partial differential equation model for limit order book dynamics," Papers 1904.03058, arXiv.org, revised May 2021.
    11. Peter Bank & Ibrahim Ekren & Johannes Muhle-Karbe, 2018. "Liquidity in Competitive Dealer Markets," Papers 1807.08278, arXiv.org, revised Mar 2021.
    12. Peter Bank & Ibrahim Ekren & Johannes Muhle‐Karbe, 2021. "Liquidity in competitive dealer markets," Mathematical Finance, Wiley Blackwell, vol. 31(3), pages 827-856, July.
    13. Rama Cont & Mihai Cucuringu & Vacslav Glukhov & Felix Prenzel, 2023. "Analysis and modeling of client order flow in limit order markets," Quantitative Finance, Taylor & Francis Journals, vol. 23(2), pages 187-205, February.
    14. Pinter, Gabor, 2023. "An anatomy of the 2022 gilt market crisis," Bank of England working papers 1019, Bank of England.
    15. Czech, Robert & Pintér, Gábor, 2020. "Informed trading and the dynamics of client-dealer connections in corporate bond markets," Bank of England working papers 895, Bank of England, revised 20 Jan 2022.
    16. Holland, John H & Miller, John H, 1991. "Artificial Adaptive Agents in Economic Theory," American Economic Review, American Economic Association, vol. 81(2), pages 365-371, May.
    17. Alicia Vidler & Toby Walsh, 2024. "Decoding OTC Government Bond Market Liquidity: An ABM Model for Market Dynamics," Papers 2501.16331, arXiv.org.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Alicia Vidler & Toby Walsh, 2024. "Modelling Opaque Bilateral Market Dynamics in Financial Trading: Insights from a Multi-Agent Simulation Study," Papers 2405.02849, arXiv.org.
    2. Alicia Vidler & Toby Walsh, 2024. "TraderTalk: An LLM Behavioural ABM applied to Simulating Human Bilateral Trading Interactions," Papers 2410.21280, arXiv.org.
    3. Alicia Vidler & Toby Walsh, 2024. "Non cooperative Liquidity Games and their application to bond market trading," Papers 2405.02865, arXiv.org.
    4. Nelson Vadori & Leo Ardon & Sumitra Ganesh & Thomas Spooner & Selim Amrouni & Jared Vann & Mengda Xu & Zeyu Zheng & Tucker Balch & Manuela Veloso, 2022. "Towards Multi-Agent Reinforcement Learning driven Over-The-Counter Market Simulations," Papers 2210.07184, arXiv.org, revised Aug 2023.
    5. Hill, Brian & Michalski, Tomasz, 2018. "Risk versus ambiguity and international security design," Journal of International Economics, Elsevier, vol. 113(C), pages 74-105.
    6. Marcel Nutz & Kevin Webster & Long Zhao, 2023. "Unwinding Stochastic Order Flow: When to Warehouse Trades," Papers 2310.14144, arXiv.org.
    7. Condie, Scott & Ganguli, Jayant, 2017. "The pricing effects of ambiguous private information," Journal of Economic Theory, Elsevier, vol. 172(C), pages 512-557.
    8. Luc Arrondel & Jérôme Coffinet, 2018. "Demand For Stocks in the Crisis: France 2004-2014," PSE Working Papers halshs-01785324, HAL.
    9. Benjamin Gardner & Yesol Huh, 2024. "Information Friction in OTC Interdealer Markets," Finance and Economics Discussion Series 2024-040, Board of Governors of the Federal Reserve System (U.S.).
    10. Luc Arrondel & André Masson, 2017. "Why does household demand for shares decline during the crisis? The French case," Economie et Statistique / Economics and Statistics, Institut National de la Statistique et des Etudes Economiques (INSEE), issue 494-495-4, pages 155-177.
    11. Christian Flor & Linda Larsen, 2014. "Robust portfolio choice with stochastic interest rates," Annals of Finance, Springer, vol. 10(2), pages 243-265, May.
    12. Izhakian, Yehuda, 2020. "A theoretical foundation of ambiguity measurement," Journal of Economic Theory, Elsevier, vol. 187(C).
    13. Jiang, Julia & Liu, Jun & Tian, Weidong & Zeng, Xudong, 2022. "Portfolio concentration, portfolio inertia, and ambiguous correlation," Journal of Economic Theory, Elsevier, vol. 203(C).
    14. Kanin Anantanasuwong & Roy Kouwenberg & Olivia S. Mitchell & Kim Peijnenberg, 2019. "Ambiguity Attitudes about Investments: Evidence from the Field," NBER Working Papers 25561, National Bureau of Economic Research, Inc.
    15. David Hirshleifer & Chong Huang & Siew Hong Teoh, 2017. "Index Investing and Asset Pricing under Information Asymmetry and Ambiguity Aversion," NBER Working Papers 24143, National Bureau of Economic Research, Inc.
    16. Agarwal, Vikas & Arisoy, Y. Eser & Naik, Narayan Y., 2017. "Volatility of aggregate volatility and hedge fund returns," Journal of Financial Economics, Elsevier, vol. 125(3), pages 491-510.
    17. Massimo Guidolin & Francesca Rinaldi, 2013. "Ambiguity in asset pricing and portfolio choice: a review of the literature," Theory and Decision, Springer, vol. 74(2), pages 183-217, February.
    18. Chao Tang, 2017. "Ambiguity and Investment Decisions: An Empirical Analysis on Mutual Fund Investor Behaviour," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 3(3), pages 38-46, September.
    19. Barria, Rodrigo & Pinter, Gabor, 2023. "Mispricing in inflation markets," Bank of England working papers 1034, Bank of England.
    20. Jeffrey Butler & Luigi Guiso & Tullio Jappelli, 2014. "The role of intuition and reasoning in driving aversion to risk and ambiguity," Theory and Decision, Springer, vol. 77(4), pages 455-484, December.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2503.00320. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.