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Systems 2017, 5(4), 54; doi:10.3390/systems5040054

Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds

1
Muma College of Business, University of South Florida, 4202 East Fowler Avenue, Tampa, FL 33620, USA
2
FinaMetrics LLC, Tampa, FL 33647, USA
These authors contributed equally to this work.
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Received: 1 October 2017 / Revised: 18 November 2017 / Accepted: 28 November 2017 / Published: 6 December 2017
(This article belongs to the Special Issue Pervasive Simulation for Enhanced Decision Making)
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Abstract

In this paper, we introduce a small-scale heterogeneous agent-based model of the US corporate bond market. The model includes a realistic micro-grounded ecology of investors that trade a set of bonds through dealers. Using the model, we simulate market dynamics that emerge from agent behaviors in response to basic exogenous factors (such as interest rate shocks) and the introduction of regulatory policies and constraints. A first experiment focuses on the liquidity transformation provided by mutual funds and investigates the conditions under which redemption-driven bond sales may trigger market instability. We simulate the effects of increasing mutual fund market shares in the presence of market-wide repricing of risk (in the form of a 100 basis point increase in the expected returns). The simulations highlight robust-yet-fragile aspects of the growing liquidity transformation provided by mutual funds, with an inflection point beyond which redemption-driven negative feedback loops trigger market instability. View Full-Text
Keywords: agent-based modeling (ABM); corporate bond market; financial crises; liquidity risk; mutual funds agent-based modeling (ABM); corporate bond market; financial crises; liquidity risk; mutual funds
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This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. (CC BY 4.0).

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MDPI and ACS Style

Berndt, D.J.; Boogers, D.; Chakraborty, S.; McCart, J. Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds. Systems 2017, 5, 54.

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