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Asset Price Dynamics among Heterogeneous Interacting Agents

Author

Listed:
  • Carl Chiarella
  • Mauro Gallegati
  • Roberto Leombruni
  • Antonio Palestrini

Abstract

In this paper, we investigate the presence of rationalherding on asset price dynamics during the intra-day trading withheterogeneous interacting agents, whose information set is notcomplete. In the model, individual probability measures offinancial investment strategies are defined using statisticalmechanics concepts. In addition, there is a learning processtoward the best strategy, implemented as a geneticalgorithm. Simulations show that imitative behavior can be arational strategy, since it allows an investor to gain excessreturns on an asset by exploiting information regarding pricedynamics not strictly contained in the fundamental solution. Herdbehavior is rational in the sense that it produces profits at theexpense of increasing the complexity of the system. Copyright Kluwer Academic Publishers 2003
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Suggested Citation

  • Carl Chiarella & Mauro Gallegati & Roberto Leombruni & Antonio Palestrini, 2002. "Asset Price Dynamics among Heterogeneous Interacting Agents," Computing in Economics and Finance 2002 222, Society for Computational Economics.
    • Handle: RePEc:sce:scecf2:222
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    Cited by:

    1. Ehsan Ahmed & J. Barkley Rosser, Jr. & Jamshed Y. Uppal, 2016. "A Raging Bull or a Long-term Speculative Bubble? The Puzzling Case of the Karachi Stock Exchange," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 55(2), pages 79-93.
    2. Huang, Weihong & Chen, Zhenxi, 2020. "Modelling contagion of financial crises," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Roy Cerqueti & Giulia Rotundo, 2015. "A review of aggregation techniques for agent-based models: understanding the presence of long-term memory," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(4), pages 1693-1717, July.
    4. Zhenxi Chen & Weihong Huang & Huanhuan Zheng, 2018. "Estimating heterogeneous agents behavior in a two-market financial system," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(3), pages 491-510, October.
    5. Chang, Sheng-Kai, 2007. "A simple asset pricing model with social interactions and heterogeneous beliefs," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1300-1325, April.
    6. Weihong HUANG & Wanying Wang, 2012. "Price-Volume Relations in Financial Market," Economic Growth Centre Working Paper Series 1209, Nanyang Technological University, School of Social Sciences, Economic Growth Centre.
    7. Carl Chiarella & Roberto Dieci & Xue-Zhong He, 2008. "Heterogeneity, Market Mechanisms, and Asset Price Dynamics," Research Paper Series 231, Quantitative Finance Research Centre, University of Technology, Sydney.
    8. Orlando Gomes, 2008. "Decentralized Allocation of Human Capital and Nonlinear Growth," Computational Economics, Springer;Society for Computational Economics, vol. 31(1), pages 45-75, February.
    9. Thomas Holtfort, 2019. "From standard to evolutionary finance: a literature survey," Management Review Quarterly, Springer, vol. 69(2), pages 207-232, June.
    10. V. Alfi & L. Pietronero & A. Zaccaria, 2008. "Minimal Agent Based Model For The Origin And Self-Organization Of Stylized Facts In Financial Markets," Papers 0807.1888, arXiv.org.
    11. Ducha, F.A. & Atman, A.P.F. & Bosco de Magalhães, A.R., 2021. "Information flux in complex networks: Path to stylized facts," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 566(C).
    12. Gallegati, Mauro & Palestrini, Antonio & Rosser, J. Barkley, 2011. "The Period Of Financial Distress In Speculative Markets: Interacting Heterogeneous Agents And Financial Constraints," Macroeconomic Dynamics, Cambridge University Press, vol. 15(1), pages 60-79, February.
    13. Kukacka, Jiri & Barunik, Jozef, 2013. "Behavioural breaks in the heterogeneous agent model: The impact of herding, overconfidence, and market sentiment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 392(23), pages 5920-5938.
    14. 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.
    15. Andrew Foster & Natasha Kirby, 2011. "Analysis of a Heterogeneous Trader Model for Asset Price Dynamics," Discrete Dynamics in Nature and Society, Hindawi, vol. 2011, pages 1-12, October.
    16. Philip Z. Maymin, 2010. "Schizophrenic Representative Investors," Papers 1004.4592, arXiv.org.
    17. Chang Sheng-Kai, 2014. "Herd behavior, bubbles and social interactions in financial markets," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 18(1), pages 89-101, February.
    18. Huang, Weihong & Zheng, Huanhuan, 2012. "Financial crises and regime-dependent dynamics," Journal of Economic Behavior & Organization, Elsevier, vol. 82(2), pages 445-461.
    19. Chiarella, Carl & He, Xue-Zhong & Huang, Weihong & Zheng, Huanhuan, 2012. "Estimating behavioural heterogeneity under regime switching," Journal of Economic Behavior & Organization, Elsevier, vol. 83(3), pages 446-460.
    20. Chen, Zhenxi, 2014. "Estimating heterogeneous agents behavior with different investment horizons in stock markets," FinMaP-Working Papers 5, Collaborative EU Project FinMaP - Financial Distortions and Macroeconomic Performance: Expectations, Constraints and Interaction of Agents.
    21. Ehsan Ahmed & J. Barkley Rosser Jr. & Jamshed Y. Uppal, 2010. "Emerging Markets and Stock Market Bubbles: Nonlinear Speculation?," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 46(4), pages 23-40, January.

    More about this item

    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games

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