Trust and credit freezes in an agent-based bilayer network model of the interbank market

Research output: Working paper

Abstract

In this paper, we develop an agent-based model of the interbank market that proceeds along two main dimensions. In the frrst step, we simulate a network calibrated on a size distribution of heterogenous banks as well as known topological properties of the short-term interbank money market. Within this layer, bilateral exposures comprise the interdependencies between banks. In order to allow for fire sale contagion occurring due to correlated asset portfolios, we introduce a second network layer whereby bank interdependencies correspond to the degree of overlap between their derivatives portfolios. Taking the network as given, we launch a bank balance-sheet based agent-based model in which exogenous liquidity shocks drive banks' aggregate activities and endogenous trust drives their behaviour vis-à-vis one another.
Original languageEnglish
Publication statusIn preparation - 2014

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Interbank market
Network model
Agent-based
Credit
Interdependencies
Agent-based model
Balance sheet
Money market
Bilateral
Liquidity shocks
Derivatives
Contagion
Assets

Cite this

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title = "Trust and credit freezes in an agent-based bilayer network model of the interbank market",
abstract = "In this paper, we develop an agent-based model of the interbank market that proceeds along two main dimensions. In the frrst step, we simulate a network calibrated on a size distribution of heterogenous banks as well as known topological properties of the short-term interbank money market. Within this layer, bilateral exposures comprise the interdependencies between banks. In order to allow for fire sale contagion occurring due to correlated asset portfolios, we introduce a second network layer whereby bank interdependencies correspond to the degree of overlap between their derivatives portfolios. Taking the network as given, we launch a bank balance-sheet based agent-based model in which exogenous liquidity shocks drive banks' aggregate activities and endogenous trust drives their behaviour vis-{\`a}-vis one another.",
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AB - In this paper, we develop an agent-based model of the interbank market that proceeds along two main dimensions. In the frrst step, we simulate a network calibrated on a size distribution of heterogenous banks as well as known topological properties of the short-term interbank money market. Within this layer, bilateral exposures comprise the interdependencies between banks. In order to allow for fire sale contagion occurring due to correlated asset portfolios, we introduce a second network layer whereby bank interdependencies correspond to the degree of overlap between their derivatives portfolios. Taking the network as given, we launch a bank balance-sheet based agent-based model in which exogenous liquidity shocks drive banks' aggregate activities and endogenous trust drives their behaviour vis-à-vis one another.

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