Prices, Debt and Market Structure in an Agent-Based Model of the Financial Market

Thomas Fischer and Jesper Riedler

Publications of Darmstadt Technical University, Institute for Business Studies (BWL) from Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL)

Abstract: We develop an agent-based model in which heterogenous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. The introduction of balance sheets and debt into an agent-based setup is relatively new to the literature and allows us to tackle several research questions that are mostly inaccessible following conventional methodology, especially representative agent models. A number of findings emerge when simulating the model. We find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. When further analyzing the relationship between leverage and balance sheets, we observe that decreasing credit frictions result in an increasingly procyclical behavior of leverage, which is typical for investment banks. We show how decreasing credit frictions increase volatility but decrease the number of bankruptcies. JEL classification: C63 - D53 - D84

Keywords: agent-based; model; -; financial; markets; -; instability; -; balance; sheets; -; leverage; -; size; distribution; -; credit; frictions (search for similar items in EconPapers)
Date: 2012-07-13
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Published in ZEW Discussion Papers 12-045 (2012-07-13)

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Related works:
Journal Article: Prices, debt and market structure in an agent-based model of the financial market (2014)
Working Paper: Prices, debt and market structure in an agent-based model of the financial market (2014)
Working Paper: Prices, Debt and Market Structure in an Agent-Based Model of the Financial Market (2014)
Working Paper: Prices, debt and market structure in an agent-based model of the financial market (2013)
Working Paper: Prices, debt and market structure in an agent-based model of the financial market (2012)
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