Modeling Individual Actions and Interactions on the Microstructure Level
31 Pages Posted: 20 May 2013
Date Written: Dec 10, 2012
Abstract
Models of interacting agents are able to describe simultaneously the so-called stylized facts about financial markets. Agent-based financial market modeling basically constitutes a problem of organized complexity. Individual behavior is determined by both deterministic and stochastic factors that influence the decision process and, therefore, the choice or action of the decision-maker. In this paper, we propose a Discrete Choice model that is able to handle the complexity of individual decision-making in capital markets. The model integrates different classes of agents (i.e. segmentation), and explicitly models the role of market participants’ perception and attitudes. The market is entirely driven by interactions on the level of individual market participants. In order to model individual behavior realistically, we combine choice and expectations data, as stressed by Manski (2004).
Keywords: financial markets, market microstructure, behavioral finance, discrete choice theory, agent-based models
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