Regulatory management of distressed financial markets using simulation

Government economic policy regarding the financial markets in the United States has been focused on promoting self-regulation based on a belief in natural equilibrium. This has led to decreased regulation and permitted an increase in the complexity of financial assets that has to some degree exceeded the capability of the market to understand the fundamentals of what is being traded. This lack of understanding or information about these assets' values created liquidity problems, and contributed to the crises seen in both US and world markets. Through the use of an agent-based simulation model of an economic market, this paper looks at the effect of information on keeping the markets liquid and at potential strategies to protect markets from illiquidity failure. It considers how the three main government controlled market influences: interest rate targeting, `information' regulation, and market making can affect market stability.

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