 Prices, debt and market structure in an agent-based model of the financial marketThomas Fischer and Jesper Riedler No 12-045, ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research Abstract: We develop an agent-based model in which heterogenous and boundedly rational agents interact by trading a risky asset at an endogenously set price. Agents are endowed with balance sheets comprising the risky asset as well as cash on the asset side and equity capital as well as debt on the liabilities side. The introduction of balance sheets and debt into an agent-based setup is relatively new to the literature and allows us to tackle several research questions that are mostly inaccessible following conventional methodology, especially representative agent models. A number of findings emerge when simulating the model. We find that the empirically observable log-normal distribution of bank balance sheet size naturally emerges and that higher levels of leverage lead to a greater inequality among agents. When further analyzing the relationship between leverage and balance sheets, we observe that decreasing credit frictions result in an increasingly procyclical behavior of leverage, which is typical for investment banks. We show how decreasing credit frictions increase volatility but decrease the number of bankruptcies. Keywords: agent-based model; financial markets; instability; balance sheets; leverage; size distribution; credit frictions (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:zbw:zewdip:12045 Access Statistics for this paper More papers in ZEW Discussion Papers from ZEW - Leibniz Centre for European Economic Research Contact information at EDIRC. |
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