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SUMMARY:The dynamics of the leverage cycle - Aymanns\, C (University of Ox
 ford)
DTSTART:20141105T150000Z
DTEND:20141105T160000Z
UID:TALK55983@talks.cam.ac.uk
CONTACT:Mustapha Amrani
DESCRIPTION:We present a simple agent-based model of a financial system co
 mposed of leveraged investors such as banks that invest in stocks and mana
 ge their risk using a Value-at-Risk constraint\, based on historical obser
 vations of asset prices. We show that this leads to endogenous irregular o
 scillations\, in which gradual increases in stock prices and leverage are 
 followed by drastic market collapses\, i.e. a leverage cycle. This phenome
 non is studied using further simplified models. We introduce a flexible le
 verage regulation policy in which it is possible to continuously tune from
  pro-cyclical to countercyclical leverage. In order to identify the optima
 l parameters of this leverage policy we study the trade off between risk i
 n the financial sector and bank leverage. Our results suggest that the opt
 imal leverage policy is close to constant leverage while slightly counterc
 yclical.\n
LOCATION:Seminar Room 2\, Newton Institute Gatehouse
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