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Impact Analysis of Financial Regulation on Multi-Asset Markets Using Artificial Market Simulations

Author

Listed:
  • Masanori Hirano

    (Department of Systems Innovation, School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan)

  • Kiyoshi Izumi

    (Department of Systems Innovation, School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan)

  • Takashi Shimada

    (Department of Systems Innovation, School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan
    Mathematics and Informatics Center, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan)

  • Hiroyasu Matsushima

    (Department of Systems Innovation, School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan)

  • Hiroki Sakaji

    (Department of Systems Innovation, School of Engineering, The University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo 113-8656, Japan)

Abstract

In this study, we assessed the impact of capital adequacy ratio (CAR) regulation in the Basel regulatory framework. This regulation was established to make the banking network robust. However, a previous work argued that CAR regulation has a destabilization effect on financial markets. To assess impacts such as destabilizing effects, we conducted simulations of an artificial market, one of the computer simulations imitating real financial markets. In the simulation, we proposed and used a new model with continuous double auction markets, stylized trading agents, and two kinds of portfolio trading agents. Both portfolio trading agents had trading strategies incorporating Markowitz’s portfolio optimization. Additionally, one type of portfolio trading agent was under regulation. From the simulations, we found that portfolio optimization as each trader’s strategy stabilizes markets, and CAR regulation destabilizes markets in various aspects. These results show that CAR regulation can have negative effects on asset markets. As future work, we should confirm these effects empirically and consider how to balance between both positive and negative aspects of CAR regulation.

Suggested Citation

  • Masanori Hirano & Kiyoshi Izumi & Takashi Shimada & Hiroyasu Matsushima & Hiroki Sakaji, 2020. "Impact Analysis of Financial Regulation on Multi-Asset Markets Using Artificial Market Simulations," JRFM, MDPI, vol. 13(4), pages 1-20, April.
    • Handle: RePEc:gam:jjrfmx:v:13:y:2020:i:4:p:75-:d:346788
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    References listed on IDEAS

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    Cited by:

    1. Masanori Hirano & Ryosuke Takata & Kiyoshi Izumi, 2023. "PAMS: Platform for Artificial Market Simulations," Papers 2309.10729, arXiv.org.

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