Bank Avalanche Model of Systemic Risk Eric Fischer & Judith - - PowerPoint PPT Presentation

Bank Avalanche Model of Systemic Risk

Eric Fischer & Judith Samson Center for Analytical Finance

UC Santa Cruz

November 13, 2013

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Outline

Research Question Motivation Previous Literature Bank Avalanche Model Calibration and Simulation Results Next steps

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Research Question

How can we understand the dynamic interconnectedness of the financial system?

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Research Question

How can we understand the dynamic interconnectedness of the financial system? How can we stabilize the system and keep it from collapse while still maintaining profitability?

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Motivation

Janet Yellen speech January 4, 2013 American Economic Association "Interconnectedness and Systemic Risk: Lessons from the Financial Crisis and Policy Implications"

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Motivation

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Motivation

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Motivation

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Previous Literature

Diamond and Dybvig (1983) Allen and Gale (2002) Caballero and Simsek (2011) Gai, Haldane, and Capadia (2011) Acemoglu, Ozdaglar, Tahbaz-Salehi (2013) Friedman (1998) and (2013)

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Bank Avalanche Model

Agents: NFTs, Banks, and AIG

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Bank Avalanche Model

Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback

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Bank Avalanche Model

Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Bank actions: Euroloan, Eurodeposit

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Bank Avalanche Model

Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Bank actions: Euroloan, Eurodeposit Bank Avalanche

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Bank Avalanche Model

Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Bank actions: Euroloan, Eurodeposit Bank Avalanche AIG: Buy and sell insurance (CDS)

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Calibration and Simulation

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Calibration and Simulation

Run the simulation in Netlogo

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Results

Complete network (without and with AIG)

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Results

Incomplete network (without and with AIG)

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Results

Financial network structure Economic conditions: good times, bad times, good to bad times Complete network more profitable but less stable, system lasts longer in bad times than in good times Introduce AIG and evolutionary dynamics

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Next steps

Introduce evolutionary game theory dynamics Have agents respond to the behavior of other agents Measure the contagion effect Determine various market equilibrium outcomes

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