Heterogeneous Agent Models in Economics and Finance

Tinbergen Institute Discussion Paper No. TI 05-056/1

70 Pages Posted: 13 Jun 2005

See all articles by Cars H. Hommes

Cars H. Hommes

University of Amsterdam - Amsterdam School of Economics (ASE); CeNDEF; Tinbergen Institute

Date Written: May 2005

Abstract

This paper surveys work on dynamic heterogeneous agent models (HAMs) in economics and finance. Emphasis is given to simple models that, at least to some extent, are tractable by analytic methods in combination with computational tools. Most of these models are behavioral models with boundedly rational agents using different heuristics or rule of thumb strategies that may not be perfect, but perform reasonably well. Typically these models are highly nonlinear, e.g. due to evolutionary switching between strategies, and exhibit a wide range of dynamical behavior ranging from a unique stable steady state to complex, chaotic dynamics. Aggregation of simple interactions at the micro level may generate sophisticated structure at the macro level. Simple HAMs can explain important observed stylized facts in financial time series, such as excess volatility, high trading volume, temporary bubbles and trend following, sudden crashes and mean reversion, clustered volatility and fat tails in the returns distribution.

Keywords: Interacting agents, behavioral economics, evolutionary finance, complex adaptive systems, nonlinear dynamics, numerical simulation

JEL Classification: B4, C0, C6, D84, E3, G1, G12

Suggested Citation

Hommes, Cars H., Heterogeneous Agent Models in Economics and Finance (May 2005). Tinbergen Institute Discussion Paper No. TI 05-056/1. Available at SSRN: https://ssrn.com/abstract=742384 or http://dx.doi.org/10.2139/ssrn.742384

Cars H. Hommes (Contact Author)

University of Amsterdam - Amsterdam School of Economics (ASE) ( email )

Center for Nonlinear Dynamics in Economics and Finance
1018 WB Amsterdam
Netherlands
+31 20 525 4246 (Phone)
+31 20 525 4349 (Fax)

CeNDEF ( email )

Roetersstraat 11
Amsterdam, NL-1018WB
Netherlands

HOME PAGE: http://www1.fee.uva.nl/cendef/

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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