An agent-based approach to interbank market lending decisions and risk implications

Anqi Liu, Cheuk Yin Jeffrey Mo, Mark E. Paddrik, Steve Y. Yang

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

In this study, we examine the relationship of bank level lending and borrowing decisions and the risk preferences on the dynamics of the interbank lending market. We develop an agent-based model that incorporates individual bank decisions using the temporal difference reinforcement learning algorithm with empirical data of 6600 U.S. banks. The model can successfully replicate the key characteristics of interbank lending and borrowing relationships documented in the recent literature. A key finding of this study is that risk preferences at the individual bank level can lead to unique interbank market structures that are suggestive of the capacity with which the market responds to surprising shocks.

Original languageEnglish
Article number132
JournalInformation (Switzerland)
Volume9
Issue number6
DOIs
StatePublished - 29 May 2018

Keywords

  • Contagion risk
  • Interbank market
  • Multi-agent system
  • Reinforcement learning agents

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