Agent-based risk management – a regulatory approach to financial markets

Thomas Theobald

Journal of Economic Studies, 2015, vol. 42, issue 5, 780-820

Abstract: Purpose - – The purpose of this paper is to provide market risk calculation for an equity-based trading portfolio. Instead of relying on the purely stochastic internal model method which banks currently apply in line with the Basel regulatory requirements, the author also propose including alternative price mechanisms from the financial literature in the regulatory framework. Design/methodology/approach - – For this purpose, a financial market model with heterogeneous agents is developed, capturing the realistic feature that parts of the investors do not follow the assumption of no arbitrage, but are motivated by behavioral heuristics instead. Findings - – Although both the standard stochastic and the behavioral model are restricted to a calibration including the last 250 trading days, the latter is able to capitalize possible turbulence on financial markets and likewise the well-known phenomenon of excess volatility – even if the last 250 days reflect a non-turbulent market. Practical implications - – Thus, including agent-based models in the regulatory framework could create better capital requirements with respect to their level and counter-cyclicality. Originality/value - – This in turn could reduce the extent to which bubbles arise, since market participants would have to anticipate comprehensively the costs of such bubbles bursting. Furthermore, a key ratio is deduced from the agent-based construction to lower the influence of speculative derivatives.

Keywords: Financial crisis; Systemic risk; Behavioral finance; Agent-based model (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
Working Paper: Agent-based risk management - A regulatory approach to financial markets (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:jespps:v:42:y:2015:i:5:p:780-820

DOI: 10.1108/JES-03-2013-0039

Access Statistics for this article

Journal of Economic Studies is currently edited by Prof Mohsen Bahmani-Oskooee

More articles in Journal of Economic Studies from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().