Models of Financial Stability and their Application in Stress Tests
Christoph Aymanns (),
Alissa M. Keinniejenhuis and
No 1805, Working Papers on Finance from University of St. Gallen, School of Finance
This paper reviews the literature on heterogeneous agent models of financial stability and their application in stress tests. We open with the observation that the financial system is a complex system, which heterogeneous agent models are well-suited to analyze. The paper then proceeds in two parts. In the first part, we discuss the fundamental drivers of systemic risk in financial systems, and set out how our understanding of them can be informed by heterogeneous agent models. We focus on models of systemic risk resulting from leverage constraints and models of financial contagion due to interconnectedness. In the second part of this review, we discuss how the conceptual insights from leverage and contagion models can be combined to model and understand systemic risk more broadly and to build robust and data-driven stress tests.
Keywords: social learning; networks; multi-agent deep reinforcement learning (search for similar items in EconPapers)
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Working Paper: Models of Financial Stability and Their Application in Stress Tests (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:usg:sfwpfi:2018:05
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