Abstract:
In this paper, we investigate the presence of rational herding on asset price dynamics
during the intra-day trading with heterogeneous interacting agents, whose infonnation set is not
complete. In the model, individual probability measures of financial investment strategies are defined
using statistical mechanics concepts. In addition, there is a learning process toward the best strategy,
implemented as a genetic algorithm. Simulations show that imitative behavior can be a rational strategy,
since it allows an investor to gain excess returns on an asset by exploiting information regarding
price dynamics not strictly contained in the fundamental solution. Herd behavior is rational in the
sense that it produces profits at the expense of increasing the complexity of the system.
