Related papers: Leverage Bubble
We present a self-consistent model for explosive financial bubbles, which combines a mean-reverting volatility process and a stochastic conditional return which reflects nonlinear positive feedbacks and continuous updates of the investors'…
We propose a minimal model of the secured interbank network able to shed light on recent money markets puzzles. We find that excess liquidity emerges due to the interactions between the reserves and liquidity ratio constraints; the…
This work develops an agent-based model for the study of how the leverage through the use of repurchase agreements can function as a mechanism for the propagation and amplification of financial shocks in a financial system. Based on the…
We present a simple agent-based model to study the development of a bubble and the consequential crash and investigate how their proximate triggering factor might relate to their fundamental mechanism, and vice versa. Our agents invest…
We study the market selection hypothesis in complete financial markets, populated by heterogeneous agents. We allow for a rich structure of heterogeneity: individuals may differ in their beliefs concerning the economy, information and…
Since August 2000, the stock market in the USA as well as most other western markets have depreciated almost in synchrony according to complex patterns of drops and local rebounds. In \cite{SZ02QF}, we have proposed to describe this…
A dynamical model is introduced for the formation of a bullish or bearish trends driving an asset price in a given market. Initially, each agent decides to buy or sell according to its personal opinion, which results from the combination of…
We present a plausible micro-founded model for the previously postulated power law finite time singular form of the crash hazard rate in the Johansen-Ledoit-Sornette model of rational expectation bubbles. The model is based on a percolation…
Twenty-two significant bubbles followed by large crashes or by severe corrections in the Argentinian, Brazilian, Chilean, Mexican, Peruvian, Venezuelan, Hong-Kong, Indonesian, Korean, Malaysian, Philippine and Thai stock markets indices are…
In the current environment of financial distress, many governments are likely to soon become major holders of financial assets, but the policy debate focuses only on the likelihood and extent of short-term market stabilization. This paper…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
By combining (i) the economic theory of rational expectation bubbles, (ii) behavioral finance on imitation and herding of investors and traders and (iii) the mathematical and statistical physics of bifurcations and phase transitions, the…
An interbank market lets participants pool the risk arising from the combination of illiquid investments and random withdrawals by depositors. But it also creates the potential for one bank's failure to trigger off avalanches of further…
Systemic financial risk refers to the simultaneous failure or destabilization of multiple financial institutions, often triggered by contagion mechanisms or common exposures to shocks. In this paper, we present a dynamical model of bank…
The financial crisis of 2008, which started with an initially well-defined epicenter focused on mortgage backed securities (MBS), has been cascading into a global economic recession, whose increasing severity and uncertain duration has led…
We present a simple agent-based model of a financial system composed of leveraged investors such as banks that invest in stocks and manage their risk using a Value-at-Risk constraint, based on historical observations of asset prices. The…
The leverage effect refers to the well-established relationship between returns and volatility. When returns fall, volatility increases. We examine the role of the leverage effect with regards to generating density forecasts of equity…
We define and study a rather complex market model, inspired from the Santa Fe artificial market and the Minority Game. Agents have different strategies among which they can choose, according to their relative profitability, with the…
We study the Johansen-Ledoit-Sornette (JLS) model of financial market crashes (Johansen, Ledoit, and Sornette [2000] "Crashes as Critical Points." Int. J. Theor. Appl. Finan. 3(2) 219-255). On our view, the JLS model is a curious case from…
In this paper, we develop a theory of market crashes resulting from a deleveraging shock. We consider two representative investors in a market holding different opinions about the public available information. The deleveraging shock forces…