IMITATION IN FINANCIAL MARKETS

Harjoat Bhamra

International Journal of Theoretical and Applied Finance (IJTAF), 2000, vol. 03, issue 03, 473-478

Abstract: It is believed that trading agents often imitate the behaviour of those around them. In its excessive form this imitation can help lead to large increases or decreases in asset-prices over a small time, often described as bubbles and crashes. In this paper we examine a model in which rational agents repeatedly trade one asset whose price is influenced by supply and demand together with a stochastic noise term. Each agent is able to observe and remember the actions of her nearest neighbours. Furthermore the agents receive private information about the asset-price. We find that profit-maximization implies that agents should to some extent imitate the behaviour of the people around them allowing the use of the Ising Spin Model to investigate agent-agent interactions.

Keywords: Interactions; beliefs (search for similar items in EconPapers)
Date: 2000
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DOI: 10.1142/S0219024900000425

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