The regulation of financial derivates: an agent-based model approach
Authors
Publication date
28 May 2015
Publisher
Università degli Studi di Cagliari
Abstract
In 2007-08, the world experienced the greatest financial crisis since 1929, which turned
– in the following years – in one of the deepest and most prolonged periods of economic
stagnation of modern history. While there were multiple conditions that originated the
so-called Great Financial Crisis, a general consensus emerged that financial derivatives
played an important role in the outbreak of the crisis and in posing a credible threat that
the entire global financial system could melt down. As a reaction, several countries in
the world and international organizations agreed on a policy response to reformulate the
global architecture for the regulation of the financial system, including the financial
derivatives industry. Yet, the fundamental question of whether the contemporary system
of derivatives regulation can effectively shield the financial system from sources of
systemic risk is still undecided, for reasons that especially relate to the complexity of
the networked structure of the financial derivatives industry. As a way to contribute to
tackle this issue, this work aims to investigate whether an important component part of
the present system of financial derivatives regulation – namely, Central Counterparts
(CCPs) Clearing Houses – provide a more resilient financial system. The research
question is addressed through a simulation approach based on an agent-based modeling
of the financial derivatives industry. The results of the simulation show that the
introduction of a CCP improves the resilience of the simulated financial derivatives
industry, although it does not completely shield the financial system from disruptions
that may especially depend from the degree of interconnectedness of financial operators
and the magnitude of defaults. In sum, this work offers some methodological guidance
for enriching the repertoire of tools at disposal of financial regulatory authorities in
anticipating the consequences of interventions in the financial industry
