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In this chapter, we present 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. 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-wide price instability.
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- Using Agent-Based Modeling to Assess Liquidity Mismatch in Open-End Bond Funds
Donald J. Berndt
- Chapter 11
in-adhesives, MKVS, Zühlke/© Zühlke