Financial contagion : evolutionary optimisation of a multinational agent-based model

Caporale, Guglielmo Maria, Serguieva, Antoaneta and Wu, Hao (2008) Financial contagion : evolutionary optimisation of a multinational agent-based model. Centre for International Capital Markets discussion papers, 2008 (18). pp. 1-26. ISSN 1749-3412


Over the past two decades, financial market crises with similar features have occurred in different regions of the world. Unstable cross-market linkages during a crisis are referred to as financial contagion. We simulate crisis transmission in the context of a model of market participants adopting various strategies; this allows testing for financial contagion under alternative scenarios. Using a minority game approach, we develop an agent-based multinational model and investigate the reasons for contagion. Although the phenomenon has been extensively investigated in the financial literature, it has not been studied through computational intelligence techniques. Our simulations shed light on parameter values and characteristics which can be exploited to detect contagion at an earlier stage, hence recognising financial crises with the potential to destabilise crossmarket linkages. In the real world, such information would be extremely valuable in developing appropriate risk management strategies.

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