Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds

Authored by Donald J Berndt, David Boogers, Saurav Chakraborty, James McCart

Date Published: 2017

DOI: 10.3390/systems5040054

Sponsors: United States National Science Foundation (NSF)

Platforms: No platforms listed

Model Documentation: Other Narrative

Model Code URLs: Model code not found

Abstract

In this paper, we introduce a small-scale heterogeneous agent-based model of the US corporate bond market. The model includes a realistic micro-grounded ecology of investors that trade a set of bonds through dealers. Using the model, we simulate market dynamics that emerge from agent behaviors in response to basic exogenous factors (such as interest rate shocks) and the introduction of regulatory policies and constraints. A first experiment focuses on the liquidity transformation provided by mutual funds and investigates the conditions under which redemption-driven bond sales may trigger market instability. We simulate the effects of increasing mutual fund market shares in the presence of market-wide repricing of risk (in the form of a 100 basis point increase in the expected returns). The simulations highlight robust-yet-fragile aspects of the growing liquidity transformation provided by mutual funds, with an inflection point beyond which redemption-driven negative feedback loops trigger market instability.

Tags

Agent-based modeling (ABM) Financial crises Mutual funds Financial-markets Liquidity risk Corporate bond market