Heterogeneous Agent Models in Finance

This chapter surveys the state-of-art of heterogeneous agent models (HAMs) in finance using a jointly theoretical and empirical analysis, combined with numerical analysis from the latest development in computational finance. It provides supporting evidence on the explanatory power of HAMs to various stylized facts and market anomalies through model calibration, estimation, and economic mechanisms analysis. It presents HAMs within the mainstream finance and provides a unified framework in continuous time to study the impact of historical price information on price dynamics, profitability and optimality of fundamental and momentum trading. It demonstrates how HAMs can help to understand stock price co-movements and evolutionary CAPM. It also introduces a new HAMs perspective on house price dynamics and an integrated approach to study dynamics of limit order markets. The survey provides further insights into the complexity and efficiency of financial markets and policy implications.