Heterogeneous Agents in Financial Markets

Abstract

In the previous decades, evidence against the efficient market hypothesis has been mounting. As a result, the behavioral finance literature has emerged, which embeds psychological influences in financial economics. The current thesis fits within the behavioral finance literature, and is focused on the fact that bounded rationality also implies heterogeneity between investors. Heterogeneous agents models describe the behavior of individuals and how the combination of individuals forms the total market. The heterogeneous agents literature has primarily been based on simulation techniques. In this thesis, the models are estimated for a number of markets (foreign exchange, equity, and options) using a number of different techniques. The results indicate that the heterogeneous agents model is generally able to outperform the benchmark.