Bank Contagion Risk through Fire-Sales: A Heterogeneous Agent Model

Xingjia Zhang, Cheuk Yin Jeffrey Mo, Steve Y. Yang

Research output: Chapter in Book/Report/Conference proceedingConference contributionpeer-review

1 Scopus citations

Abstract

This paper studies the impact of interbank risk exposures due to fire sales in the interbank lending market. We incorporate fire sale behaviors in a large-scale agent-based model that represents dynamic U.S. Interbank lending system. We compare the simulated interbank networks with and without fire sales. The model shows that fire sales reduce the number of bank defaults due to financial shocks, while increasing the likelihood of contagion. Moreover, we investigate the implications of the capital requirements imposed by the Basel regulation by conducting a sensitivity test on capital ratios. We find the higher capital requirements may result in larger number of bank defaults.

Original languageEnglish
Title of host publicationProceedings of the 2018 IEEE Symposium Series on Computational Intelligence, SSCI 2018
EditorsSuresh Sundaram
Pages2321-2328
Number of pages8
ISBN (Electronic)9781538692769
DOIs
StatePublished - 2 Jul 2018
Event8th IEEE Symposium Series on Computational Intelligence, SSCI 2018 - Bangalore, India
Duration: 18 Nov 201821 Nov 2018

Publication series

NameProceedings of the 2018 IEEE Symposium Series on Computational Intelligence, SSCI 2018

Conference

Conference8th IEEE Symposium Series on Computational Intelligence, SSCI 2018
Country/TerritoryIndia
CityBangalore
Period18/11/1821/11/18

Keywords

  • Agent-based simulation
  • contagion risk
  • fire sale
  • interbank lending market
  • liquidity risk
  • network topology

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