Saturday, April 11, 2009

Modeling the Meltdown; Part 4: Model Elements

We now have enough information to define the building blocks of our model. In our modeling system we call these “elements”. There are a small number of element types, and each element type will support several of the specific elements of our model, as follows:
  • Proactive Agents can initiate actions in response to inputs. The financial meltdown model has two types of proactive agents: Households and businesses. Households can either own or rent. Businesses are either financial or non-financial. The model will have a population (“swarm”) of households and businesses, ultimately implementing a scaled-down representation of the actual population of households and businesses in the US.
  • Stuff elements can't take action on their own, but are owned by and exchanged among proactive agents. Stuff elements for this model include goods (produced by businesses and consumed by households or other businesses), stock (equity that businesses sell to raise capital), homes and debt (including secured credit, such as mortgages, and unsecured credit, such as credit cards). As we model structured finance, goods will include MBS, CDO and CDS, which will be traded among the financial firms. Jobs are also considered “goods”.
  • Markets exist for every good, since goods can be bought and sold. Markets allow multiple buyers to post requests for what they want (“bids”) and multiple sellers to list what they have (“asks”), and a mechanism for connecting buyers and sellers. Markets also generate statistics that can be disclosed to buyers and sellers. These markets are not necessarily auctions. For example, a grocery store is a market which connects buyers and sellers, where the sellers set a fixed price and the buyers choose to buy or not. The markets for this model include the Retail Debt, Housing, Goods, Jobs, Stocks, Secondary Debt, MBS & CDO, and CDS markets.
  • Government: The government creates constraining policies, such as bank capital requirements and consumer debt requirements. The government also sets interest rates, and can inject capital to households and businesses. There will be only one Government element in this model, but it is feasible to extend the government to include state and local governments as well, which would imply a swarm of government elements.

No comments:

Post a Comment