Applying Latin hypercube sampling to agent-based models : Understanding foreclosure contagion effects

Purpose – Agent-based modelling and simulation (ABMS) has seen wide-spread success through its applications in the sciences and social sciences over the last 15 years. As ABMS is used to model more and more complex systems, there is going to be an increase in the number of input variables used within the simulation. Any uncertainty associated with these input variables can be investigated using sensitivity analysis, but when there is uncertainty surrounding several of these input variables, a single parameter sensitivity analysis is not adequate. Latin hypercube sampling (LHS) offers a way to sample variations in multiple parameters without having to consider all of the possible permutations. This paper introduces the application of LHS to ABMS via a case study that investigates the mortgage foreclosure contagion effect. This paper aims to discuss these issues. Design/methodology/approach – Traditionally, uncertainty surrounding a single input variable is investigated using sensitivity analysis. That is, the variable is allowed to change to determine the impact of this variation on the simulation's output. When there is uncertainty about multiple input variables, then the number of simulation runs required to undertake this investigation greatly increases due to the permutations that need to be considered. LHS, which was first derived by McKay et al. , offers a proven mechanism to reduce the number of simulation runs needed to complete a sensitivity analysis. This paper describes the LHS technique and its applications to an agent-based simulation (ABS) for investigating the foreclosure contagion effect. Findings – The results from the foreclosure ABS runs have been characterized as “good”, “bad” or “ugly”, corresponding to whether or not a property market crash has occurred. As the only thing that can induce a property market crash within our model is the spread of foreclosing properties, these results indicate that the foreclosure contagion effect is dependent on how much impact a foreclosed property has on the price of the surrounding properties. Originality/value – This paper describes the application of LHS to an agent-based foreclosure simulation. The foreclosure model and its results have been described in Gangel et al. Given a certain output “boundary” found within these results, it was highly appropriate to conduct an extensive sensitivity analysis on the simulation's input variables. The outcome of the LHS sensitivity analysis has given further insight into the foreclosure contagion effect thus demonstrating it was a beneficial exercise.