An Agent-Based Model for Crisis Liquidity Dynamics

36 Pages Posted: 23 Sep 2015

See all articles by Richard M. Bookstaber

Richard M. Bookstaber

Board of Regents - University of California Office of the CIO

Mark E. Paddrik

Government of the United States of America - Office of Financial Research

Date Written: September 16, 2015

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.

Keywords: Liquidity, agent-based modeling, price impact, limit orderbook, market making

JEL Classification: D40, G01, G12, G14, G17, G33

Suggested Citation

Bookstaber, Richard M. and Paddrik, Mark Endel, An Agent-Based Model for Crisis Liquidity Dynamics (September 16, 2015). Office of Financial Research Working Paper No. 15-18, Available at SSRN: https://ssrn.com/abstract=2664230 or http://dx.doi.org/10.2139/ssrn.2664230

Richard M. Bookstaber

Board of Regents - University of California Office of the CIO ( email )

1111 Broadway
Oakland, CA 94607
United States

Mark Endel Paddrik (Contact Author)

Government of the United States of America - Office of Financial Research ( email )

717 14th Street, NW
Washington DC, DC 20005
United States

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