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The Credit Market and the Determinants of CreditCrunches: An Agent Based Modeling Approach
Umeå University, Faculty of Social Sciences, Umeå School of Business and Economics (USBE).
(English)Manuscript (preprint) (Other academic)
Abstract [en]

This paper presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.

Keyword [en]
financial stability, banking, lending, screening, truncation
National Category
Economics
Research subject
Economics
Identifiers
URN: urn:nbn:se:umu:diva-53489OAI: oai:DiVA.org:umu-53489DiVA: diva2:512721
Available from: 2012-03-28 Created: 2012-03-28 Last updated: 2012-03-30
In thesis
1. Essays on credit markets and banking
Open this publication in new window or tab >>Essays on credit markets and banking
2012 (English)Doctoral thesis, comprehensive summary (Other academic)
Abstract [en]

This thesis consists of four self-contained papers related to banking, credit markets and financial stability.   

Paper [I] presents a credit market model and finds, using an agent based modeling approach, that credit crunches have a tendency to occur; even when credit markets are almost entirely transparent in the absence of external shocks. We find evidence supporting the asset deterioration hypothesis and results that emphasize the importance of accurate firm quality estimates. In addition, we find that an increase in the debt’s time to maturity, homogenous expected default rates and a conservative lending approach, reduces the probability of a credit crunch. Thus, our results suggest some up till now partially overlooked components contributing to the financial stability of an economy.    

Paper [II] derives an econometric disequilibrium model for time series data. This is done by error correcting the supply of some good. The model separates between a continuously clearing market and a clearing market in the long-run such that we are able to obtain a novel test of clearing markets. We apply the model to the Swedish market for short-term business loans, and find that this market is characterized by a long-run nonmarket clearing equilibrium.   

Paper [III] studies the risk-return profile of centralized and decentralized banks. We address the conditions that favor a particular lending regime while acknowledging the effects on lending and returns caused by the course of the business cycle. To analyze these issues, we develop a model which incorporates two stylized facts; (i) banks in which lendingdecisions are decentralized tend to have a lower cost associated with screening potential borrowers and (ii) decentralized decision-making may generate inefficient outcomes because of lack of coordination. Simulations are used to compare the two banking regimes. Among the results, it is found that even though a bank group where decisions are decentralizedmay end up with a portfolio of loans which is (relatively) poorly diversified between regions, the ability to effectively screen potential borrowers may nevertheless give a decentralized bank a lower overall risk in the lending portfolio than when decisions are centralized.   

In Paper [IV], we argue that the practice used in the valuation of a portfolio of assets is important for the calculation of the Value at Risk. In particular, a seller seeking to liquidate a large portfolio may not face horizontal demand curves. We propose a partially new approach for incorporating this fact in the Value at Risk and Expected Shortfall measures and in an empirical illustration, we compare it to a competing approach. We find substantial differences.

Place, publisher, year, edition, pages
Umeå: Umeå University, 2012. 16 p.
Series
Umeå economic studies, ISSN 0348-1018 ; 840
Keyword
financial stability, credit market, banking, agent based model, simulations, disequilibrium, clearing market, business cycle, risk, organization
National Category
Economics
Research subject
Econometrics; Economics
Identifiers
urn:nbn:se:umu:diva-53494 (URN)978-91-7459-384-6 (ISBN)
Public defence
2012-05-04, Samhällsvetarhuset, Hörsal D, Umeå Universitet, Umeå, 10:15 (English)
Opponent
Supervisors
Available from: 2012-03-30 Created: 2012-03-28 Last updated: 2012-05-29Bibliographically approved

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CiteExportLink to record
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Citation style
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Language
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