CMPS272, Winter 2007, Section 01: AsianContagion

Modeling the Asian Contagion

We are attempting to model the Asian financial market collapses of 1997-1998 using cellular automata. Over the course of several chaotic months, booming financial markets in Indonesia, the Philippines, Korea, Malaysia, and Thailand reversed course and collapsed. Growth rates in these countries, which had been running in excess of 5% annually, went negative; interest rates skyrocketed. The IMF provided a $36 billion bailout to three of the worst-hit countries, Indonesia, Korea, and Thailand; total external financial support was approximately $100 billion.

Analysts have attributed the crisis to a pernicious interaction between large foreign direct investment flows ("hot money") and weak domestic institutions (a weak banking system, poor corporate governance, a lack of transparency in the financial sector, and widespread corruption). We will attempt to incorporate the structural inefficiencies into the payoff matrices of the model, while representing the capital flows as agents seeking superior risk-adjusted returns, with risk assessments changing substantially throughout the simulation. We will attempt to first identify evolutionary equilibria that might be representative of the steady growth of the years preceding the crisis and to identify the sensitivities of the model parameters (that is, changes in which parameters are most likely to cause severe perturbations in the system).

Cells in the model will represent the Unites States, Japan, Indonesia, Thailand, Malaysia, and Korea. Agents will represent to-be-determined magnitudes of investment capital. In order to model the free flow of capital across borders, each of the cells will be contiguous (perhaps in the form of hexagonal cells on a torus).

Our research interest is in determining the sensitivity of the model to particular parameters – which factors acted as dampers on the crisis, which as accelerants? Also, was the system inherently unstable, or was a stable equilibrium shattered by some exogenous shock, such as the unwinding of the Yen carry trade?

-- AndrewAtkinson? - 18 Jan 2007