The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Interacting Agents in Finance

  • Cars Hommes
Reference work entry
DOI: https://doi.org/10.1057/978-1-349-95189-5_2466

Abstract

Interacting agents in finance represent a behavioural, agent-based approach in which financial markets are viewed as complex adaptive systems consisting of many boundedly rational agents interacting through simple heterogeneous investment strategies, constantly adapting their behaviour in response to new information and strategy performance, and through social interactions. An interacting agent system acts as a noise filter, transforming and amplifying purely random news about economic fundamentals into an aggregate market outcome exhibiting important stylized facts such as unpredictable asset prices and returns, excess volatility, temporary bubbles and sudden crashes, large and persistent trading volume, clustered volatility and long memory.

Keywords

Agent-based modelling Arbitrage Asset prices Asymmetric information Behavioural finance Bounded rationality Bubbles Clustered volatility Discrete choice Complexity Evolutionary selection mechanisms Excess volatility Expectations Finance Herding Cost of information Interacting agents in finance Long memory Multiple equilibria Noise traders No-trade theorems Random choice Rational expectations Representative agent Social interaction Stylized facts 

JEL Classifications

G1 E3 D01 D84 D85 
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Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Cars Hommes
    • 1
  1. 1.