An agent-based model for financial vulnerability
Authored by Richard Bookstaber, Mark Paddrik, Brian Tivnan
Date Published: 2018
DOI: 10.1007/s11403-017-0188-1
Sponsors:
No sponsors listed
Platforms:
No platforms listed
Model Documentation:
Other Narrative
Mathematical description
Model Code URLs:
Model code not found
Abstract
This study addresses a critical regulatory shortfall by developing a
platform to extend stress testing from a microprudential approach to a
dynamic, macroprudential approach. This paper describes the ensuing
agent-based model for analyzing the vulnerability of the financial
system to asset- and funding-based fire sales. The model captures the
dynamic interactions of agents in the financial system extending from
the suppliers of funding through the intermediation and transformation
functions of the bank/dealers to the financial institutions that use the
funds to trade in the asset markets. The model replicates the key
finding that it is the reaction to initial losses, rather than the
losses themselves, that determine the extent of a crisis. By building on
a detailed mapping of the transformations and dynamics of the financial
system, the agent-based model provides an avenue toward risk management
that can illuminate the pathways for the propagation of key crisis
dynamics such as fire sales and funding runs.
Tags
Agent-based models
Banking
Leverage
Systemic risk
Contagion
Financial networks
Interbank market
Financial intermediation
Macroprudential
Stress testing
Funding liquidity
Exposures