An agent-based model for financial vulnerability

  • Richard Bookstaber
  • Mark PaddrikEmail author
  • Brian Tivnan
Regular Article


This study addresses a critical regulatory shortfall by developing a platform to extend stress testing from a microprudential approach to a dynamic, macroprudential approach. This paper describes the ensuing agent-based model for analyzing the vulnerability of the financial system to asset- and funding-based fire sales. The model captures the dynamic interactions of agents in the financial system extending from the suppliers of funding through the intermediation and transformation functions of the bank/dealers to the financial institutions that use the funds to trade in the asset markets. The model replicates the key finding that it is the reaction to initial losses, rather than the losses themselves, that determine the extent of a crisis. By building on a detailed mapping of the transformations and dynamics of the financial system, the agent-based model provides an avenue toward risk management that can illuminate the pathways for the propagation of key crisis dynamics such as fire sales and funding runs.


Agent-based models Financial intermediation Financial networks Contagion Macroprudential Stress testing 

JEL Classification

G01 G14 

Supplementary material

11403_2017_188_MOESM1_ESM.docx (6.7 mb)
Supplementary material 1 (docx 6889 KB)


  1. Acharya VV, Gromb D, Yorulmazer T (2012) Imperfect competition in the interbank market for liquidity as a rationale for central banking. Macroecon Am Econ J 4(2):184–217Google Scholar
  2. Adrian T, Shin HS (2010) Liquidity and leverage. J Financ Intermed 19(3):418–437CrossRefGoogle Scholar
  3. Adrian T, Shin HS (2014) Pro-cyclical leverage and value-at-risk. Rev Financ Stud 27(2):373–403CrossRefGoogle Scholar
  4. Battiston S, Puliga M, Kaushik R, Tasca P, Caldarelli G (2012) Debtrank: too central to fail? Financial networks, the fed and systemic risk. Sci Rep 2:541Google Scholar
  5. Basel Committee on Banking Supervision (2010) Basel III: a global regulatory framework for more resilient banks and banking systems. Basel Committee on Banking Supervision, BaselGoogle Scholar
  6. Basel Committee on Banking Supervision (2013) Basel III: the liquidity coverage ratio and liquidity risk monitoring tools. Basel Committee on Banking Supervision, BaselGoogle Scholar
  7. Bigbee AJ, Brady SM, Harvey CE, Bookstaber R, Burke CD, Henscheid ZA, Koehler MT, McMahon MT, Paddrik ME, Slater D, Tivnan BF (2015) An agent-based model for financial vulnerability: supplementary materials. OFR Working Papers SupplementGoogle Scholar
  8. Bluhm M, Faia E, Krahnen JP (2014) Endogenous banks’ networks, cascades and systemic risk. SAFE Working PaperGoogle Scholar
  9. Bookstaber R (2007) A demon of our own design: markets, hedge funds, and the perils of financial innovation. Wiley, New JerseyGoogle Scholar
  10. Bookstaber R, Cetina J, Feldberg G, Flood M, Glasserman P, et al (2013) Stress tests to promote financial stability: assessing progress and looking to the future. Office of Financial Research Working Paper, 10Google Scholar
  11. Brunnermeier MK, Pedersen LH (2009) Market liquidity and funding liquidity. Rev Financ Stud 22(6): 2201–2238CrossRefGoogle Scholar
  12. Caccioli F, Catanach TA, Farmer JD (2012) Heterogeneity, correlations and financial contagion. Adv Complex Syst 15(02):1250058CrossRefGoogle Scholar
  13. Chen R-R, Chidambaran N, Imerman MB, Sopranzetti BJ (2014) Liquidity, leverage, and Lehman: a structural analysis of financial institutions in crisis. J Bank Financ 45:117–139CrossRefGoogle Scholar
  14. Cifuentes R, Ferrucci G, Shin HS (2005) Liquidity risk and contagion. J Eur Econ Assoc 3(2–3):556–566CrossRefGoogle Scholar
  15. Copeland AM, Martin A, Walker M (2010) The tri-party repo market before the 2010 reforms. Report, FRB of New York Staff, p 477Google Scholar
  16. Danielsson J, Shin HS, Zigrand J-P (2012) Endogenous and systemic risk. Quantifying systemic risk. University of Chicago Press, Chicago, pp 73–94Google Scholar
  17. Diamond DW and Rajan RG (2001) Banks, short-term debt and financial crises: theory, policy implications and applications. In Carnegie-Rochester conference series on public policy, vol 54, p 37–71. Elsevier, LondonGoogle Scholar
  18. Drehmann M, Nikolaou K (2013) Funding liquidity risk: definition and measurement. J Bank Financ 37(7):2173–2182CrossRefGoogle Scholar
  19. Federal Reserve Board (2013a) Comprehensive capital analysis and review 2013: assessment frame- work and results. Federal Reserve, Washington DC.
  20. Federal Reserve Board (2013b) Dodd-frank act stress test 2013: aupervisory stress test methodology and results. Federal Reserve, Washington DC., 20130314
  21. Fostel A, Geanakoplos J (2008) Leverage cycles and the anxious economy (digest summary). Am Econ Rev 98(4):1211–1244CrossRefGoogle Scholar
  22. Furfine CH (2003) Interbank exposures: quantifying the risk of contagion. J Money Credit Bank 35(1):111–128Google Scholar
  23. Georg C-P (2013) The effect of the interbank network structure on contagion and common shocks. J Bank Financ 37(7):2216–2228CrossRefGoogle Scholar
  24. Gorton G, Metrick A (2012) Securitized banking and the run on repo. J Financ Econ 104(3):425–451CrossRefGoogle Scholar
  25. Gorton GB (2010) Slapped by the invisible hand: the panic of 2007. Oxford University Press, OxfordGoogle Scholar
  26. Greenwood R, Landier A, Thesmar D (2015) Vulnerable banks. J Financ Econ 115(3):471–485CrossRefGoogle Scholar
  27. Haldane A, May R (2011) Systemic risk in banking ecosystems. Nature 469(7330):351–355CrossRefGoogle Scholar
  28. Jorion P (1997) Value at risk. McGraw-Hill, New YorkGoogle Scholar
  29. Khandani AE, Lo AW (2011) What happened to the quants in August 2007? Evidence from factors and transactions data. J Financ Mark 14(1):1–46CrossRefGoogle Scholar
  30. Kleijnen JP, Sanchez SM, Lucas TW, Cioppa TM (2005) State-of-the-art review: a users’ guide to the brave new world of designing simulation experiments. INFORMS J Comput 17(3):263–289CrossRefGoogle Scholar
  31. Kyle AS (1985) Continuous auctions and insider trading. Econom J Econome Soc 53(6):1315–1335Google Scholar
  32. Ladley D (2013) Contagion and risk-sharing on the inter-bank market. J Econ Dyn Control 37(7):1384–1400CrossRefGoogle Scholar
  33. Lowenstein R (2000) When genius failed: the rise and fall of long-term capital management. Random House Trade PaperbacksGoogle Scholar
  34. Maslov S (2000) Simple model of a limit order-driven market. Phys. A Stat. Mech. Appl. 278(3):571–578CrossRefGoogle Scholar
  35. Office of Financial Research (2012) Annual reportGoogle Scholar
  36. Office of Financial Research (2013) Annual reportGoogle Scholar
  37. Office of Financial Research (2014) Annual reportGoogle Scholar
  38. Sato AH and Tasca P (2015) Dynamic interaction between asset prices and bank behavior: a systemic risk perspective. arXiv preprint: arXiv:1504.07152
  39. Shleifer A, Vishny R (2011) Fire sales in finance and macroeconomics. J Econ Perspect 25(1):29–48CrossRefGoogle Scholar
  40. Stein JC (2009) Presidential address: sophisticated investors and market efficiency. J Financ 64(4):1517–1548CrossRefGoogle Scholar
  41. Stoll HR (1978) The pricing of security dealer services: an empirical study of Nasdaq stocks. J Financ 33(4):1153–1172CrossRefGoogle Scholar
  42. Summers L, Greenspan A, Levitt A, Ranier W (1999) Over-the-counter derivatives markets and the commodity exchange act. Report of the president’s working group on financial markets. November, Washington DCGoogle Scholar
  43. Tasca P, Mavrodiev P, Schweitzer F (2014) Quantifying the impact of leveraging and diversification on systemic risk. J Financ Stab 15:43–52CrossRefGoogle Scholar
  44. Tasca P, Battiston S (2016) Market procyclicality and systemic risk. Quant Financ 16(8):1–17CrossRefGoogle Scholar
  45. Thurner S, Farmer JD, Geanakoplos J (2012) Leverage causes fat tails and clustered volatility. Quant Financ 12(5):695–707CrossRefGoogle Scholar
  46. Tsatskis I (2012) Systemic losses in banking networks: indirect interaction of nodes via asset prices. Available at SSRN 2062174Google Scholar
  47. Upper C, Worms A (2004) Estimating bilateral exposures in the German interbank market: is there a danger of contagion? Eur Econ Rev 48(4):827–849CrossRefGoogle Scholar
  48. Wells S (2002) UK interbank exposures: systemic risk implications. Financ Stab Rev 13(12):175–182Google Scholar

Copyright information

© Springer-Verlag Berlin Heidelberg (outside the USA) 2017

Authors and Affiliations

  • Richard Bookstaber
    • 1
  • Mark Paddrik
    • 1
    Email author
  • Brian Tivnan
    • 2
  1. 1.Office of Financial ResearchUnited States Department of TreasuryWashingtonUSA
  2. 2.MITRE CorporationMcLeanUSA

Personalised recommendations