Please use this identifier to cite or link to this item:
Fischer, Thomas
Riedler, Jesper
Year of Publication: 
Series/Report no.: 
FinMaP-Working Paper 21
We develop an agent-based model in which heterogeneous 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. 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. Furthermore, greater leverage increases the frequency of bankruptcies and systemic events. Credit frictions, which we define as the stickiness of debt adjustments, are able to explain a key difference in the relation between leverage and assets observed for different bank types. Lowering credit frictions leads to an increasingly pro-cyclical behavior of leverage, which is typical for investment banks. Nevertheless, the impact of credit frictions on the fragility of the model financial system is complex. Lower frictions do increase the stability of the system most of the time, while systemic events become more probable. In particular, we observe an increasing frequency of severe liquidity crises that can lead to the collapse of the entire model financial system.
agent-based model
financial markets
systemic risk
credit frictions
Document Type: 
Working Paper
Appears in Collections:

Files in This Item:
1.26 MB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.