Agent-Based Modeling of Economic Volatility and Risk Propagation on Evolving Networks

Abstract

Networks increase interdependence, which creates challenges for managing risks. This is especially apparent in areas such as financial institutions and enterprise risk management, where the actions of a single agent (firm or bank) can impact all the other agents in interconnected networks. In this paper, we use agent-based modeling (ABM) in order to analyze how local defaults of supply chain participants propagate through the dynamic supply chain network and interbank networks and form avalanches of bankruptcy. We focus on the linkage dependence among agents at the micro-level and estimate the impact on the macro activities. Combining agent-based modeling with the network analysis can shed light on understanding the primary role of banks in lending to the wider real economy. Understanding the linkage dependency among firms and banks can help in the design of regulatory paradigms that rein in systemic risk while enhancing economic growth.