Financial stability
The crisis of 2008 is widely believed to have been an example of a leverage cycle, in which lending first becomes too loose and then becomes too tight. An agent-based model for leveraged value investors shows how the use of leverage can explain the fat tails and clustered volatility observed in financial markets. Similarly, the use of Value at Risk, as embodied in Basel II, can lead to a cycle in which leverage and prices slowly rise while volatility falls, followed by a crash in which prices and leverage plummet while volatility spikes upward, resembling the Great Moderation and subsequent crisis
Research publications
2023
J. Doyne Farmer, John Geanakoplos, Matteo Richiardi, Miquel Montero, Josep Perelló and Jaume Masoliver, “Discounting the distant future: What do historical bond prices imply about the long term discount rate?”(2023). (Working paper)
Garbrand Wiersema, Alissa M. Kleinnijenhuis, Thom Wetzer, and J. Doyne Farmer, “Scenario-free analysis of financial stability with interacting contagion channels”, Journal of Banking & Finance (2023). (Research publication)
2022
Adrian Carro, Marc Hinterschweiger, Arzu Uluc and J. Doyne Farmer, “Heterogeneous effects and spillovers of macroprudential policy in an agent-based model of the UK housing market”, Industrial and Corporate Change, 2022, dtac030 (Research publication)
J. Doyne Farmer, Alissa Kleinnijenhuis, Til Schuermann, & Thom Wetzer (Eds.). (2022). Handbook of Financial Stress Testing. Cambridge: Cambridge University Press. doi:10.1017/9781108903011 (Research publication)
J Doyne Farmer, Alissa M Kleinnijenhuis and Thom Wetzer. “Stress testing the financial macrocosm”, in Handbook of Financial Stress Testing. Cambridge: Cambridge University Press (2022)
2021
Alissa M. Kleinnijenhuis, Charles Goodhart, and J. Doyne Farmer (2021). “Systemic implications of the bail-in design”. INET Oxford Working Paper No. 2021-21. (Working paper)
J Doyne Farmer, Alissa M Kleinnijenhuis and Thom Wetzer. “Stress testing the financial macrocosm”, forthcoming in Handbook of Financial Stress Testing (2021) (Research publication)
Maarten P. Scholl, Anisoara Calinescu and J. Doyne Farmer. “How Market Ecology Explains Market Malfunction”, Proceedings of the National Academy of Sciences of the United States of America (2021) (Research publication)
Torsten Heinrich, Juan, Sabuco, & J. Doyne Farmer, “A simulation of the insurance industry: the problem of risk model homogeneity”, Journal of Economic Interaction and Coordination (2021). (Research publication)
2020
J. Doyne Farmer, Alissa M. Kleinnijenhuis, Paul Nahai-Williamson, Thom Wetzer, “Foundations of system-wide financial stress testing with heterogeneous institutions”, (2020) (Working paper)
Robin L, Lumsdaine, Daniel N. Rockmore, Nick Foti, Greg Leibon, J. Doyne Farmer, “The Intrafirm Complexity of Systemically Important Financial Institutions”, Journal of Financial Stability (2020).
2018
Christoph Aymanns, J. Doyne Farmer, Alissa M. Kleinnijenhuis and Thom Wetzer. “Models of Financial Stability and Their Application in Stress Tests”, Handbook of Computational Economics Volume 4 (2018). (Research publication)
2016
Christoph Aymanns, Fabio Caccioli, J. Doyne Farmer and Vincent Tan, “Taming the Basel Leverage Cycle”, to appear in Journal of Financial Stability (2016). ** Systemic Risk Centre (Research publication)
Stefano Battiston, J. Doyne Farmer, Andreas Flache, Diego Garlaschelli, Andy Haldane, Hans Heesterbeck, Cars Hommes, Carlo Jaeger, Robert May and Marten Scheffer, “Complexity Theory to Support Public Policy and Financial Regulation: Economic Policy Needs Network Analysis and Behavioral Modeling”, Science (2016). (Commentary/Review)
2015
Robin L, Lumsdaine, Daniel N. Rockmore, Nick Foti, Greg Leibon, J. Doyne Farmer, “The Intrafirm Complexity of Systemically Important Financial Institutions”, (2015). (Working paper)
Fabio Caccioli, J. Doyne Farmer, Nick Foti and Dan Rockmore, “Overlapping Portfolios, Contagion and Financial Stability” Journal of Economic Dynamics and Control 51, 50-63 (2015). (Research publication)
Peter Klimek, Sebastian Poledna, J. Doyne Farmer and Stefan Thurner, “To Bail-out or Bail-in? Answers from an Agent-based Model”, Journal of Economic Dynamics and Control 50, 144-154 (2015). (Research publication)
Christoph Aymanns and J. Doyne Farmer, “Dynamics of the Leverage Cycle”, Journal of Economic Dynamics and Control 50, 155-179 (2015) (Research publication)
Robert Axtell and J. Doyne Farmer, “Old Economic Models Couldn’t Predict the Recession: Time for New Ones." Christian Science Monitor, Dec. 10, 2015. (Commentary/Review)
2014
Dirk Helbing, Eve Mitleton-Kelly, Jean-Philippe Bouchaud, Fabio Caccioli, J. Doyne Farmer, Steve Keen, Katharina Pistor, Dennis J. Snower, Richard Olsen, Angelo Ranaldo, Norbert Haring, Edward Fullbrook, “How to Improve the Financial Architecture and its Resilience”, (2014). (Working paper)
Fabio Caccioli, Munik Shreshtha, Cris Moore and J. Doyne Farmer, “Stability Analysis of Financial Contagion Due to Overlapping Portfolios", Journal of Banking and Finance 46, 233-245 (2014). (Research publication)
Sebastian Poledna, Stefan Thurner, J. Doyne Farmer and John Geanakoplos, “Leverage-induced Systemic Risk under Basle II and other Credit Risk Policies”, Journal of Banking & Finance 42 (2014) 199–212. (Research publication)
2013
J. Doyne Farmer, “Economics Needs to Treat the Economy as a Complex System” (2013). (Working paper)
2012
Stefan Thurner, J. Doyne Farmer and John Geanakoplos, “Leverage Causes Fat Tails And Clustered Volatility”, Quantitative Finance 12 (5) (2012): 695-707. (Research publication)
Fabio Caccioli, Jean-Philippe Bouchaud and J. Doyne Farmer, “Impact-Adjusted Valuation And The Criticality Of Leverage.", Risk, 74-77, Dec. (2012). (Research publication)
Fabio Caccioli, Thomas A. Catanach and J. Doyne Farmer, "Heterogeneity, Correlations And Financial Contagion”, Advances in Complex Systems 15(2) 1250058 (2012). (Research publication)
John Geanakoplos, Robert Axtell, J. Doyne Farmer, Peter Howitt, Benjamin Conlee, Jonathan Goldstein, Matthew Hendrey, Nathan Palmer and Chun-Yi Yang, "Getting At Systemic Risk Via An Agent-Based Model Of The Housing Market", American Economic Review 102 (3) 53-58 (2012). (Research publication)
J. Doyne Farmer, Mauro Gallegati, Cars Hommes, Alan Kirman, Paul Ormerod, Silvano Cincotti, Anxo Sanchez and Dirk Helbing. "A Complex Systems Approach To Constructing Better Models For Managing Financial Markets And The Economy", European Physics Journal214 (1) 295-324 (2012). (Research publication)
J. Doyne Farmer, “Economics Needs to Treat the Economy as a Complex System” (2012).
2009
J. Doyne Farmer and Duncan Foley, “The Economy Needs Agent-based Modeling”, Nature 460 (2009): 685-686. (Commentary/Review)
2006
J Doyne Farmer & Fabrizio Lillo (2004) On the origin of power-law tails in price fluctuations, Quantitative Finance, 4:1, 7-11, DOI: 10.1088/1469-7688/4/1/C01
2003
J. Doyne Farmer, “Avoiding Getting Lost in the Wilderness of Bounded Rationality: The Path from Zero Intelligence to No Arbitrage.” Quant. Fin. 3(4) (2003): C64-C65. (Commentary/Review)