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Financial contagion: evolutionary optimization of a multinational agent‐based model

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  • Guglielmo Maria Caporale
  • Antoaneta Serguieva
  • Hao Wu

Abstract

Over the past two decades, financial market crises with similar features have occurred in different regions of the world. Unstable cross‐market linkages during a crisis are referred to as financial contagion. We simulate crisis transmission in the context of a model of market participants adopting various strategies; this allows testing for financial contagion under alternative scenarios. Using a minority game approach, we develop an agent‐based multinational model and investigate the reasons for contagion. Although the phenomenon has been extensively investigated in the financial literature, it has not been studied through computational intelligence techniques. Our simulations shed light on parameter values and characteristics which can be exploited to detect contagion at an earlier stage, hence recognizing financial crises with the potential to destabilize cross‐market linkages. In the real world, such information would be extremely valuable in developing appropriate risk management strategies. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Guglielmo Maria Caporale & Antoaneta Serguieva & Hao Wu, 2009. "Financial contagion: evolutionary optimization of a multinational agent‐based model," Intelligent Systems in Accounting, Finance and Management, John Wiley & Sons, Ltd., vol. 16(1‐2), pages 111-125, January.
    • Handle: RePEc:wly:isacfm:v:16:y:2009:i:1-2:p:111-125
    DOI: 10.1002/isaf.296
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    Cited by:

    1. Grinis, Inna, 2015. "Credit risk spillovers, systemic importance and vulnerability in financial networks," LSE Research Online Documents on Economics 60954, London School of Economics and Political Science, LSE Library.

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    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications

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