WP2 Agent-based model of the financial system (FABM)

The goal of this package is to build the FABM and merge it with the macroeconomic model from WP3. This model will emphasize the network structure of the financial system and allow us to understand and forecast financial instability.

It will consist of banks, firms, households, investors, central banks, and regulators. This model will also incorporate realistic agent behaviour. This will enable us to model the formation of bubbles and crises, as well as regimes of stability, from the bottom-up.

In order to capture the interbank market and firm-bank credit networks, the model will assume the possibility of strategic behaviour as financial conditions change, to ensure decision-making models for agents have strong behavioural micro-foundations. This will be achieved by drawing from the output of the experiments run in WP4 and from the on-line games run in WP5.

Key objectives

  • Extend and harmonize into a single model existing ABMs that focus on: interbank networks; bank depositors and bank-firm relations; contagion and robustness of banking networks; and leverage and regulation.
  • Gain deeper understanding of systemic risk and the mechanisms of propagation of financial crisis to the real economy.
  • Unify the various approaches to this issue and establish a common language in terms of programming platforms, data structures and use of variables.
  • Analyze empirical data on actual European inter-bank network topologies, bank-firm relations, and real economy data (in collaboration with WP1 and WP3 ) in order to calibrate the model.
  • Combine the model with the financial ABM in WP3 on the simulation program developed under WP8[link] in order to understand how financial crashes spread to the real economy.
  • Ensure the simulation platform is user-friendly, and produce documentation for institutions and policymakers.

Deliverables

  • D2.1      Model extensions in a harmonized programming environment
  • D2.2      Integration of these models into a single harmonized model of financial markets
  • D2.3      Simulation platform of a final model incorporating the real economy
  • D2.4      At least two papers to be submitted for publications in academic journals
  • D2.5      Report containing critical findings on systemic risk banking regulation and the contagion mechanisms