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Agent-based model generating stylized facts of fixed income markets

Antoine Kopp, Rebecca Westphal and Didier Sornette
Additional contact information
Antoine Kopp: ETH Zurich
Rebecca Westphal: ETH Zürich - Department of Management, Technology, and Economics (D-MTEC)
Didier Sornette: ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

No 22-37, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop an agent-based model (ABM) of a financial market with multiple assets belonging either to the fixed income or equity asset classes. The aim is to reproduce the main stylized facts of fixed income markets with regards to the emerging dynamics of the yield curves. Our ABM is rooted in the market model of Kaizoji, Leiss, Saichev, and Sornette (2015) formulated with two types of traders: the rational and risk-averse fundamentalist investors and the noise traders who invest under the influence of social imitation and price momentum. The investors involved in the present market model diversify their investments between a preferred stock equivalent to a perpetual bond and multiple bonds of selected maturities. Among those, a zero-coupon bond provides a constant rate of return, while the prices of the coupon-paying bonds are determined at each time step by the equilibrium between the investors' demands and supplies. As a result, the ABM creates an evolving yield curve determined by the aggregate impact of the traders' investments. In agreement with real markets, it also produces transient turbulent periods in the prices' time series as well as a humped term structure of volatility. We compare the dynamics arising from different processes governing the risk-free rate with those of the historical U.S. treasury market. Introducing Vasicek's model of interest rates to both synthetic and empirical rates demonstrates the capacity of our ABM in reproducing the main characteristics of the surface of autocorrelation of the volatilities of the yields to maturity of the U.S. Treasury bonds for the selected time-frame.

Keywords: Agent-based model; stylized facts; transient phenomena; fixed-income; yield curve. (search for similar items in EconPapers)
JEL-codes: C60 D53 D70 G01 G17 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2022-04
New Economics Papers: this item is included in nep-cmp and nep-hme
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