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Bank Avalanche Model of Systemic Risk Eric Fischer & Judith Samson Center for Analytical Finance UC Santa Cruz November 13, 2013 Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 1 / 15 Outline Research

  1. Bank Avalanche Model of Systemic Risk Eric Fischer & Judith Samson Center for Analytical Finance UC Santa Cruz November 13, 2013 Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 1 / 15

  2. Outline Research Question Motivation Previous Literature Bank Avalanche Model Calibration and Simulation Results Next steps Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 2 / 15

  3. Research Question How can we understand the dynamic interconnectedness of the financial system? Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 3 / 15

  4. 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? Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 3 / 15

  5. Motivation Janet Yellen speech January 4, 2013 American Economic Association "Interconnectedness and Systemic Risk: Lessons from the Financial Crisis and Policy Implications" Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 4 / 15

  6. Motivation Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 5 / 15

  7. Motivation Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 6 / 15

  8. Motivation Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 7 / 15

  9. 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) Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 8 / 15

  10. Bank Avalanche Model Agents: NFTs, Banks, and AIG Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 9 / 15

  11. Bank Avalanche Model Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 9 / 15

  12. Bank Avalanche Model Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Bank actions: Euroloan, Eurodeposit Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 9 / 15

  13. Bank Avalanche Model Agents: NFTs, Banks, and AIG NFT: Deposit, Loan, Withdraw, Default, Payback Bank actions: Euroloan, Eurodeposit Bank Avalanche Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 9 / 15

  14. 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) Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 9 / 15

  15. Calibration and Simulation Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 10 / 15

  16. Calibration and Simulation Run the simulation in Netlogo Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 11 / 15

  17. Results Complete network (without and with AIG) Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 12 / 15

  18. Results Incomplete network (without and with AIG) Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 13 / 15

  19. 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 Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 14 / 15

  20. 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 Fischer & Samson (UC Santa Cruz) Bank Avalanche Model November 13, 2013 15 / 15

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