A Kinetic Theory Model of the Dynamics of Liquidity Profiles on Interbank Networks

Abstract

This paper adopts the Kinetic Theory for Active Particles (KTAP) approach to model the dynamics of liquidity profiles on a complex adaptive network system that mimic a stylized financial market. Individual incentives of investors to form or delete a link is driven, in our modelling framework, by stochastic game-type interactions modelling the phenomenology related to policy rules implemented under Basel III, and it is exogeneously and dynamically influenced by a measure of overnight interest rate. The strategic network formation dynamics that emerges from the introduced transition probabilities modelling individual incentives of investors to form or delete links, provides a wide range of measures using which networks might be considered “best” from the point of view of the overall welfare of the system. We use the time evolution of the aggregate degree of connectivity to measure the time evolving network efficiency in two different scenarios, suggesting a first analysis of the stability of the arising and evolving network structures.