Heterogeneous agent models to determine spillover effects in the context of quantitative easing
type: CreativeWork
description: We develop heterogeneous agent models to investigate financial spillover effects in the context of Quantitative Easing (QE). We consider these spillover effects from two perspectives. The first perspective studies spillovers within a network of financial institutions. The aim is to understand where amplification effects occur in the event of a shock. For this purpose, we calibrate a model of fire-sale contagion to the South African banking sector. We use cross-sectional balance sheet data for 29 South African banking institutions. Fire-sale externalities are pecuniary externalities that operate through prices. They pose a threat to the financial system because they amplify price shocks across assets and thus lead to liquidation spirals. In the first step, we investigate general shock propagation scenarios to an unsecured lending portfolio of a large bank and to a marketable asset held by all banks, i.e. South African government bonds. We rank individual banks according to their contribution to systemic risk and show the importance of cash liquidity buffers in reducing risk of fire-sale occurrences. Further, we find a critical threshold parameter which, if exceeded, makes the banking system highly unstable. In the second step, we build on findings presented by Cecchetti et al. (2017) that determine a relationship between Quantitative Easing and risk-taking behavior of financial institutions in emerging markets. Assuming that QE increases banks’ leverage, we show that the fire-sale contagion channel becomes much more pronounced. The same shock to the government bond asset class leads to higher banking sector instability. The risk to banking sector losses is not linear, but rather increases exponentially with higher leverage ratios. The second perspective of the dissertation considers spillovers between financial markets in the context of QE. We contribute to the literature that investigates the portfolio balance effect associated with QE. In essence, the portfolio bal…
abstract: We develop heterogeneous agent models to investigate financial spillover effects in the context of Quantitative Easing (QE). We consider these spillover effects from two perspectives. The first perspective studies spillovers within a network of financial institutions. The aim is to understand where amplification effects occur in the event of a shock. For this purpose, we calibrate a model of fire-sale contagion to the South African banking sector. We use cross-sectional balance sheet data for 29 South African banking institutions. Fire-sale externalities are pecuniary externalities that operate through prices. They pose a threat to the financial system because they amplify price shocks across assets and thus lead to liquidation spirals. In the first step, we investigate general shock propagation scenarios to an unsecured lending portfolio of a large bank and to a marketable asset held by all banks, i.e. South African government bonds. We rank individual banks according to their contribution to systemic risk and show the importance of cash liquidity buffers in reducing risk of fire-sale occurrences. Further, we find a critical threshold parameter which, if exceeded, makes the banking system highly unstable. In the second step, we build on findings presented by Cecchetti et al. (2017) that determine a relationship between Quantitative Easing and risk-taking behavior of financial institutions in emerging markets. Assuming that QE increases banks’ leverage, we show that the fire-sale contagion channel becomes much more pronounced. The same shock to the government bond asset class leads to higher banking sector instability. The risk to banking sector losses is not linear, but rather increases exponentially with higher leverage ratios. The second perspective of the dissertation considers spillovers between financial markets in the context of QE. We contribute to the literature that investigates the portfolio balance effect associated with QE. In essence, the portfolio bal…
author: Koziol, Tina
keywords: Economics
date published: 2019
date modified: 2026-07-22T22:23:42Z
provider: University of Cape Town
publisher: Networked Digital Library of Theses and Dissertations
type: WebPage
source organization: School of Economics

PropertyValue
property ID: Handle
value: https://hdl.handle.net/11427/31762