TY - JOUR
T1 - Borrowing capacity, financial instability, and contagion
AU - Choi, Youngna
N1 - Publisher Copyright:
© 2019 World Scientific Publishing Company.
PY - 2019/2/1
Y1 - 2019/2/1
N2 - We use the case of the 2007 United States subprime mortgage crisis to investigate the impact of borrowing capacity limitations on financial instability and contagion. We divide an economy into agents that interact via flow of funds and express the financial instability level of each agent as a function of time derivatives of its wealth, cash inflows, and borrowing capacity. We show that among these factors, the borrowing capacity, which is determined by other economic constraints, has the largest impact on financial instability. It is suggested that borrowing capacity limitations could even cause contagion through feedback loop formed by flow of funds. We use historical time series of the integrated macroeconomic accounts of the United Stated from 1960 to 2017 to verify our conjecture by quantifying the financial instability levels of the agents under different levels of borrowing capacity and how they affect one another during the period of the subprime mortgage crisis. Finally, the constraints of data collecting practice outside the United States in assessing borrowing capacity is addressed, accompanied by partial, yet compatible, results of selected Eurozone countries.
AB - We use the case of the 2007 United States subprime mortgage crisis to investigate the impact of borrowing capacity limitations on financial instability and contagion. We divide an economy into agents that interact via flow of funds and express the financial instability level of each agent as a function of time derivatives of its wealth, cash inflows, and borrowing capacity. We show that among these factors, the borrowing capacity, which is determined by other economic constraints, has the largest impact on financial instability. It is suggested that borrowing capacity limitations could even cause contagion through feedback loop formed by flow of funds. We use historical time series of the integrated macroeconomic accounts of the United Stated from 1960 to 2017 to verify our conjecture by quantifying the financial instability levels of the agents under different levels of borrowing capacity and how they affect one another during the period of the subprime mortgage crisis. Finally, the constraints of data collecting practice outside the United States in assessing borrowing capacity is addressed, accompanied by partial, yet compatible, results of selected Eurozone countries.
KW - Agent-based model
KW - borrowing capacity
KW - contagion
KW - financial instability
KW - flow of funds
KW - systemic risk
UR - http://www.scopus.com/inward/record.url?scp=85058238574&partnerID=8YFLogxK
U2 - 10.1142/S0219024918500607
DO - 10.1142/S0219024918500607
M3 - Article
AN - SCOPUS:85058238574
SN - 0219-0249
VL - 22
JO - International Journal of Theoretical and Applied Finance
JF - International Journal of Theoretical and Applied Finance
IS - 1
M1 - 1850060
ER -