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Drescher, Christian ; Herz, Bernhard:
Monetary Shocks in Bounded Efficient Financial Markets with Bounded Rational Agents.
Bayreuth
,
2012
. - 34 S.
- (Wirtschaftswissenschaftliche Diskussionspapiere der Universität Bayreuth, Rechts- und Wirtschaftswissenschaftliche Fakultät
; 09-12
)
Abstract
During the recent US financial crisis it became evident again how fast shocks can spread in the financial system. Using the analytical framework of heterogeneous agent models, we analyze how monetary shocks are processed and dispersed across a network of financial markets. We focus on micro shocks, triggered by changes in the market liquidity, and macro shocks, caused by monetary policy decisions. Our model accounts for bounded efficient financial markets producing market anomalies and bounded rational agents, who derive their decisions based upon heuristics. Firstly, our model is able to replicate key stylized facts of asset returns in financial markets. Secondly, the intensity of shocks affects financial market stability by changing the investment strategies in asset markets. Thirdly, we identify two mechanisms of contagion effects between asset markets. The substitution mechanism is triggered by changes in market-specific variables and the sentiment mechanism is initiated by herding behavior. Fourthly, our analysis shows that market efficiency in a specific asset market does not only depend upon the condition of the particular asset market but also on the conditions of the other asset markets.