Financial Stability, Systemic Risk and Stress Testing


In a 2009 paper, Farmer et al. argue why the economy needs agent-based modelling. Under Farmer’s supervision, his research group is developing the Economic Simulation Library, which provides the building blocks for such economic simulations.

The platform is used for system-wide stress testing, housing models, and insurance models. A system-wide stress test model which considers various types of financial institutions (e.g. banks, hedge funds, CCPs and asset managers) and their interconnections (e.g. common asset holdings and various types of financial contracts such as funding contracts and derivatives) has been designed by Baptista et al. (forthcoming). Economic simulations of the multi-layered network allow for the investigation of contagion and systemic risk. The group collaborates with leading central banks on this project.

Professor Farmer and people in his group have conducted leading research on systemic risk, using network analysis, agent-based modelling, and techniques from dynamical systems.

Aymanns and Farmer (2015) provided valuable insight into the role that regulation can play in amplifying systemic risk. They show that the Basel II leverage rule on banks leads to endogenous leverage cycles. Caccioli et al. (2013) show how the interaction between different contagion channels can amplify contagion. Caccioli et al. (2014) develop a network approach to the amplification of financial contagion due to the combination of overlapping portfolios and leverage, and show how it can be understood in terms of a generalized branching process.

Caccioli et al. (2012) study stability as a function of parameters such as leverage, market crowding, diversification, and market impact. we consider the effect of heterogeneous degree distributions, heterogeneous balance sheet size and degree correlations between banks.

Professor Farmer is also an expert on the market micro-structure of markets. For example, Moro et al. (2009) investigate the market impact and trading profile of hidden orders in stock markets. And Toth et al (2012) investigate the intertwined behaviour of members in a financial market.

People: Doyne Farmer, Alissa Kleinnijenhuis, Thom Wetzer

Project Leader / Primary Investigator

Prof J. Doyne Farmer

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