BoE leads foray into non-bank stress simulations
Paper sets out agent-based approach to modelling feedback loop that could create sharp price moves
The Bank of England (BoE) has made its first push into designing a non-bank stress “simulation”, setting out an agent-based model of market finance that can generate a dangerous feedback loop.
The BoE observes that while individual funds may pass all risk onto their investors, redemptions, particularly when offered daily, can create procyclicality. The work of the Financial Stability Board has reached similar conclusions.
The feedback loop at the heart of the model shows how this might work
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