Agent interactions in the minority game and the money market demand function

Abstract

This paper presents an extension of a model of heterogeneous agent-based interaction, the minority game, as a starting point for the development of a mechanism to incorporate dynamics and the role of limited information and strategies into a macroeconomic market model. Motivation for the introduction of the minority game into the modeling of financial markets is laid out, after which the variant of the minority game modified to incorporate market forces and mechanisms is presented. Building on that variant, a function is constructed to represent money market demand, its behavior in the framework of an existing model examined to link the dynamics of the minority game to that of the financial market in question. It is seen that aggregate demand for money may be be influenced not merely by existing financial market variables but also strategy and information size, features not commonly present in mainstream financial market models but of note in the minority game.