Using Agent-Based Models for Analyzing Threats to Financial Stability

This paper discusses the concepts and research related to agent-based models and explores how the dynamics of a flock of birds in flight, a group of drivers in a traffic jam, or a panicked crowd of stampeding people might inform our analysis of threats to financial stability. (Working Paper no. 12-03)

Abstract

Existing models of financial instability tend to be based on top-down, partial-equilibrium views of markets and their interactions; they are unable to incorporate the complexity of behavior among heterogeneous firms or the tendency for all types of firms to change their behavior during a crisis. This paper argues that agent-based models (ABMs) — which seek to explain how the behavior of individual firms or “agents” can affect outcomes in complex systems — can make an important contribution to our understanding of potential vulnerabilities and paths through which risks can propagate across the financial system.