Interacting Agents in Finance

Interacting agents in finance represent a behavioral, 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 behavior in response to new information, 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. JEL classification: G1, E3, D01, D84. acknowledgement. I would like to thank Mikhail Anufriev, Buz Brock and Yannis Ioannides for helpful comments on an earlier draft. ∗ address: CeNDEF, University of Amsterdam, Roetersstraat 11, NL-1018WB Amsterdam, the Netherlands. Phone number: + 31 20 525 4246, Fax numer: + 31 20 525 4349, email: [email protected].