Agent-Based modeling in financial markets: Modeling frameworks, validation challenges, and emerging applications

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Abstract

As financial markets have increasingly exhibited heterogeneity across participants, complex interactions among them, and out-of-equilibrium dynamics, have provided growing interest in agent-based modeling (ABM). Unlike traditional representative-agent models, ABMs generate macro-level market behavior from the bottom up through interactions among adaptive agents. In this paper, we review the development and applications of ABMs in financial markets and provide a structured perspective on the growing literature. Specifically, we reviewed three key design axes-agent heterogeneity, market mechanism fidelity, and interaction topology-and discussed how different modeling assumptions shape the ability of ABMs to reproduce stylized financial market phenomena. We also discussed two emerging domains in which ABMs are increasingly applied: Simulations using LLM-based agents and modeling approaches in green energy finance and climate-related financial systems. Here, we identified the current boundaries of financial ABM research and promising directions for future research.

Keywords

agent-based modeling / financial markets / heterogeneous agents / interaction networks / systemic risk / model validation / LLM-based agents / green finance / climate-related financial systems

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