Propagation of Financial Crises: A Heterogenous Agents Approach

Weihong Huang and Zhenxi Chen
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Weihong Huang: Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.

No 1309, Economic Growth Centre Working Paper Series from Nanyang Technological University, School of Social Sciences, Economic Growth Centre

Abstract: We propose a two-market heterogeneous agents model with coupling mechanism to study Financial crisis with contagion effect. It manages to calibrate sudden crash behavior of US and UK stock markets during "Black Monday" of 1987 besides smooth crisis and disturbing crisis categorized in literature. It is implied that financial crisis and its contagion could be endogenous and supports scenario of over-valuation causing financial crisis. In addition, the model shows that financial system could be fragile in which small shock(s) hitting individual market's fundamental could cause financial crisis which spreads to other market. It also supports scenario of external shock triggering financial crisis. Lastly, the model manages to match typical stylized facts, especially cross-correlation which is exclusive to multi-market case.

Keywords: Evolutionary biology; happiness; interpersonal comparison; measurability; wellbeing; welfare (search for similar items in EconPapers)
JEL-codes: C61 D84 G15 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2013-09
New Economics Papers: this item is included in nep-sea
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Persistent link: https://EconPapers.repec.org/RePEc:nan:wpaper:1309

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