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An agent-based model of corporate bond trading

Author

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  • K. Braun-Munzinger
  • Z. Liu
  • A. E. Turrell

Abstract

We construct an heterogeneous agent-based model of the corporate bond market and calibrate it against US data. The model includes the interactions between a market maker, three types of fund, and cash investors. In general, the sensitivity of the market maker to demand and the degree to which momentum traders are active strongly influence the over- and under-shooting of yields in response to shocks, while investor behaviour plays a comparatively smaller role. Using the model, we simulate experiments of relevance to two topical issues in this market. Firstly, we show that measures to reduce the speed with which investors can redeem investments can reduce the extent of yield dislocation. Secondly, we find the unexpected result that a larger fraction of funds using passive investment strategies increases the tail risk of large yield dislocations after shocks.

Suggested Citation

  • K. Braun-Munzinger & Z. Liu & A. E. Turrell, 2018. "An agent-based model of corporate bond trading," Quantitative Finance, Taylor & Francis Journals, vol. 18(4), pages 591-608, April.
    • Handle: RePEc:taf:quantf:v:18:y:2018:i:4:p:591-608
    DOI: 10.1080/14697688.2017.1380310
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    Cited by:

    1. Marc van Kralingen & Diego Garlaschelli & Karolina Scholtus & Iman van Lelyveld, 2020. "Crowded trades, market clustering, and price instability," Tinbergen Institute Discussion Papers 20-007/II, Tinbergen Institute.
    2. Mitja Steinbacher & Matthias Raddant & Fariba Karimi & Eva Camacho Cuena & Simone Alfarano & Giulia Iori & Thomas Lux, 2021. "Advances in the agent-based modeling of economic and social behavior," SN Business & Economics, Springer, vol. 1(7), pages 1-24, July.
    3. Masanori Hirano & Ryosuke Takata & Kiyoshi Izumi, 2023. "PAMS: Platform for Artificial Market Simulations," Papers 2309.10729, arXiv.org.

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