We review heterogeneous agent-based models of financial stability and their application in stress tests. In contrast to the mainstream approach, which relies heavily on the rational expectations assumption and focuses on situations where it is possible to compute an equilibrium, this approach...

Effective risk control must make a tradeoff between the microprudential risk of exogenous shocks to individual institutions and the macroprudential risks caused by their systemic interactions. We investigate a simple dynamical model for understanding this tradeoff, consisting of a bank with a...

What kind of models do we need to guide us through the next crisis? If past crises are any indication, we need to explore new approaches. During the Great Financial Crisis, the models that existed at the time were of little value because they focused on firm-level interactions and did not...