Simulation of financial systemic risk and contagion in the U.S. housing market

Abstract

This paper presents an agent-based model (ABM) to model systemic risk in the housing market from 1986 to 2017. We provide a unique approach to simulating the financial market along with demonstrating the phenomenon of emergence resulting from the interconnected-behavior of consumers, banks and the Federal Reserve. Consumers can buy or rent properties, and these agents own characteristics such as income and may be employed or unemployed. Banks own balance sheets to monitor their assets and liabilities and participate in the interbank lending market with one another. This tool can assess the complexity of the United States’ housing market, conduct stress tests as interest rates fluctuate, and explore the landmark financial crisis and epidemic of foreclosures. This is important because understanding the impact from increases in foreclosed properties and changes in rates can help policymakers and bankers have a better understanding of the complexity within the housing market.