Chapter 12
Agent-Based Modeling
of Financial Markets
12.1 INTRODUCTION
Agent-based modeling has become a popular methodology in
social sciences, particularly in economics.
1
Here we focus on the
agent-based modeling of financial markets [1]. The very idea of
describing markets with models of interacting agents (traders, invest-
ors) does not fit well with the classical financial theory that is based
on the notions of efficient markets and rational investors. However, it
has become obvious that investors are neither perfectly rational nor
have homogeneous expectations of the market trends (see also Section
2.3). Agent-based modeling proves to be a flexible framework for a
realistic description of the investor adaptation and decision-making
process.
The paradigm of agent-based modeling applied to financial markets
implies that trader actions determine price. This concept is similar to
that of statistical physics within which the thermodynamic (macro-
scopic) properties of the medium are described via molecular inter-
actions. A noted expansion of the microscopic modeling methodology
into social systems is the minority game (see [2] and references therein).
Its development was inspired by the famous El Farol’s bar problem [3].
This problem considers a number of patrons N willing to attend a bar
with a number of seats N
s
. It is assumed that N
s
< N and every patron
prefers to stay at home if he expects that the number of people
129

Get Quantitative Finance for Physicists now with the O’Reilly learning platform.

O’Reilly members experience live online training, plus books, videos, and digital content from nearly 200 publishers.