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Unwinding ZIRP: A simulation analysis

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  • Feldman, Todd

Abstract

This paper sets up a zero interest rate policy (ZIRP) experiment, using a two-market agent-based simulation model, in order to analyze the price dynamics of a large and small stock market during the unwinding of a simulated ZIRP. Different unwinding paths are created to determine which path has the most stabilizing impact on both the large and small stock market. Results indicate, that increasing the interest rate every three months create significant financial crises and negative stock market returns. However, increasing the rate every year leads to only modest declines in the large and small stock market. Moreover, the size of the interest rate change plays a much smaller role then the frequency of the rate changes. Rate increases every quarter creates 20% market corrections in the large market during the unwinding phase, as opposed to 4% downside when rate changes occur once a year.

Suggested Citation

  • Feldman, Todd, 2018. "Unwinding ZIRP: A simulation analysis," Finance Research Letters, Elsevier, vol. 24(C), pages 278-288.
    • Handle: RePEc:eee:finlet:v:24:y:2018:i:c:p:278-288
    DOI: 10.1016/j.frl.2017.09.024
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    References listed on IDEAS

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    More about this item

    Keywords

    Behavioral finance; Agent-based models; ZIRP;
    All these keywords.

    JEL classification:

    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • G01 - Financial Economics - - General - - - Financial Crises
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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