Title: Growth and collapse: an agent-based banking model of endogenous leverage cycles and financial contagion

Authors: Robert De Caux; Frank McGroarty; Markus Brede

Addresses: Electronics and Computer Science, University of Southampton, Southampton SO17 1BJ, UK ' Southampton Business School, University of Southampton, Southampton SO17 1BJ, UK ' Electronics and Computer Science, University of Southampton, Southampton SO17 1BJ, UK

Abstract: We create an agent-based banking model that allows the simulation of leverage cycles and financial contagion. Banks adapt their investment strategies in an evolutionary manner according to the success of their competitors, creating an endogenous loan network and a dynamic asset market. This system exhibits periods of slow risk growth and fast insolvency cascades. We show how the susceptibility of banks to insolvency and contagion over the long term depends on asset price volatility, as well as demonstrating an interdependency between asset and liability-side contagion channels. Our model provides a suitable framework for performing further policy tests.

Keywords: financial contagion; agent-based model; bank insolvency; evolutionary game theory; simulation; networks.

DOI: 10.1504/IJCEE.2018.096376

International Journal of Computational Economics and Econometrics, 2018 Vol.8 No.3/4, pp.370 - 387

Received: 24 Nov 2016
Accepted: 20 Nov 2017
Published online: 27 Nov 2018 *

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