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An Agent-Based Model of Liquidity

Author

Listed:
  • Richard Bookstaber

    (Regents of the University of California)

  • Mark Paddrik

    (Office of Financial Research)

Abstract

Financial crises are often characterized by sharp reductions in liquidity followed by cascades of falling prices. Researchers are making progress in work to understand the levels of liquidity on a daily basis, but understanding the vulnerability of liquidity to market shocks remains a challenge. We develop an agent-based model with the objective of evaluating the market dynamics that lead the market supply of liquidity to recede during periods of crisis. The model uses a limit-order-book framework to examine the interaction of three types of traditional market agents: liquidity demanders, liquidity suppliers, and market makers. The paper highlights the implications of changes in market makers' ability to provide intermediation services and the heterogeneous decision cycles of liquidity demanders versus liquidity suppliers for crisis-induced illiquidity.

Suggested Citation

  • Richard Bookstaber & Mark Paddrik, 2015. "An Agent-Based Model of Liquidity," Working Papers 15-18, Office of Financial Research, US Department of the Treasury.
    • Handle: RePEc:ofr:wpaper:15-18
    as

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    File URL: https://financialresearch.gov/working-papers/files/OFRwp-2015-18_Agent-based-Model-for-Crisis-Liquidity-Dynamics.pdf
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    References listed on IDEAS

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    Cited by:

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    3. Giovanni Dosi & Andrea Roventini, 2019. "More is different ... and complex! the case for agent-based macroeconomics," Journal of Evolutionary Economics, Springer, vol. 29(1), pages 1-37, March.
    4. Aikman, David & Chichkanov, Pavel & Douglas, Graeme & Georgiev, Yordan & Howat, James & King, Benjamin, 2019. "System-wide stress simulation," Bank of England working papers 809, Bank of England.
    5. Karvik, Geir-Are & Noss, Joseph & Worlidge, Jack & Beale, Daniel, 2018. "The deeds of speed: an agent-based model of market liquidity and flash episodes," Bank of England working papers 743, Bank of England.
    6. James Paulin & Anisoara Calinescu & Michael Wooldridge, 2018. "Understanding Flash Crash Contagion and Systemic Risk: A Micro-Macro Agent-Based Approach," Papers 1805.08454, arXiv.org.
    7. Baranova, Yuliya & Douglas, Graeme & Silvestri, Laura, 2019. "Simulating stress in the UK corporate bond market: investor behaviour and asset fire-sales," Bank of England working papers 803, Bank of England.
    8. Mr. Jorge A Chan-Lau, 2017. "Variance Decomposition Networks: Potential Pitfalls and a Simple Solution," IMF Working Papers 2017/107, International Monetary Fund.
    9. Christoph Aymanns & J. Doyne Farmer & Alissa M. Keinniejenhuis & Thom Wetzer, 2017. "Models of Financial Stability and their Application in Stress Tests," Working Papers on Finance 1805, University of St. Gallen, School of Finance.
    10. Hałaj, Grzegorz, 2018. "Agent-based model of system-wide implications of funding risk," Working Paper Series 2121, European Central Bank.
    11. Paulin, James & Calinescu, Anisoara & Wooldridge, Michael, 2019. "Understanding flash crash contagion and systemic risk: A micro–macro agent-based approach," Journal of Economic Dynamics and Control, Elsevier, vol. 100(C), pages 200-229.

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