Role of Behavioral Heterogeneity in Aggregate Financial Market Behavior: An Agent-Based Approach

D In this paper, an agent-based model of stock market is proposed to study the effects of cognitive processes and behaviors of the traders (e.g. decision-making, interpretation of public information and learning) on the emergent phenomena of financial markets. In financial markets, psychology and sociology of the traders play a critical role in giving rise to unique and unexpected (emergent) macroscopic properties. This study suggests that local interactions, rational and irrational decision-making approaches and heterogeneity, which has been incorporated into different aspects of agent design, are among the key elements in modeling financial markets. When heterogeneity of the strategies used by the agents increases, volatility clustering and excess kurtosis arises in the model, which is in agreement with real market fluctuations. To evaluate the effectiveness and validity of the approach, a series of statistical analysis was conducted to test the artificial data with respect to a benchmark provided by the Bank of America (BAC) stock over a sufficiently long period of time. The results revealed that the model was able to reproduce and explain some of the most important stylized facts observed in actual financial time series and was consistent with empirical observations. (C) 2017 The Authors. Published by Elsevier B.V.