Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model †
Abstract
Methods: This paper develops an ABM to replicate financial instability, such as bubbles and crashes in asset markets, by introducing a simple idea of ‘heterogeneous expectation’ and ‘herding behavior’ by which agents in different groups have different expectations about a ‘tipping point’ where they expect the price to stop rising anymore but to begins to fall.
Results: It is shown that, when the agents have different expectations on the tipping point, the collapse of the price does not emerge automatically, and price fluctuations are often small and even some (seemingly) flat intervals appear. We also verify the impact of the herding behavior by dividing agents into several groups of varying sizes but with the same expectations. By changing the size of groups, we establish that the more agents share the same expectations about the tipping point, the higher volatility of the asset price emerges.
Conclusions: We confirm that bubble and burst of prices are more like to emerge when heterogeneous expectations about prices are combined with herding behavior among agents, so that agents in the same group share the similar expectations about the price changes.
Share and Cite
Lee, S.; Lee, K. Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model. J. Open Innov. Technol. Mark. Complex. 2015, 1, 12. https://doi.org/10.1186/s40852-015-0013-9
Lee S, Lee K. Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model. Journal of Open Innovation: Technology, Market, and Complexity. 2015; 1(1):12. https://doi.org/10.1186/s40852-015-0013-9
Chicago/Turabian StyleLee, Sunyoung, and Keun Lee. 2015. "Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model" Journal of Open Innovation: Technology, Market, and Complexity 1, no. 1: 12. https://doi.org/10.1186/s40852-015-0013-9