Financial Crisis and Interacting Heterogeneous Agents

In this paper we examine various types of financial crises and conjecture its underlying mechanisms using a deterministic heterogeneous agent model (HAM). In a market-maker framework, forward-looking investors update their price expectation according to psychological trading windows and cluster themselves strategically to optimize their expected profit. The switch between strategies leads to the dynamics in market that subsequently moves price up and down, and in extreme, causes financial crises. The model suggests that both fundamentalists and chartists as well as the way they interact with each other, could potentially contribute to the financial crises