Heterogeneous expectations leading to bubbles and crashes in asset markets: Tipping point, herding behavior and group effect in an agent-based model

Abstract

This paper develops an agent-based model(ABM) to replicate financial instability, such as bubbles and crashes in asset markets, by introducing a simple idea of 'heterogeneous expectation' by which agents have different expectations about a 'tipping point' where they expect the price to stop rising anymore but to begins to fall. An ABM in this paper also verifies the impact of the herding behavior by dividing agents into several groups of varying sizes but with the same expectations. By changing the size or the number of groups, it establishes that the more agents share the same expectations about the tipping point, the higher volatility of the asset price emerges.