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A Dynamic Agent-Based Computational Economics (ACE) Model of RMBS Issuance, Credit Risk Transfer and Financial Stability

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This paper uses a two-sector agent-based computational economics (ACE) model to assess whether a system of dynamic decision making by institutional investors and/or by issuing banks (e.g. loss aversion, decision making according to simplified rule of thumb behaviour) can lead to unsustainable increases in issuance or large scale fluctuation in prices of securitised assets. The paper also highlights policy issues associated with the design of financial market regulations and the financial market infrastructures (FMIs) such as central counterparties (CCPs) that directly participate in trading over-the-counter (OTC) derivatives where the pricing of underlying credit and other risks is key.

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