Portfolio manager behavior and global financial crises

I develop a two market agent-based model to study how global portfolio managers affect global financial crises and stability. First, I create an agent-based model where fund managers make their allocation decisions between two markets and a risk-free asset based on the mean variance framework. Simulation results reveal that global managers do not create global financial crises. Second, I extend the base model by incorporating insights from behavioral finance where risk is instead determined by fund manager losses. Simulation results reveal that slight global manager losses can trigger a widening of both markets’ risk premium, accelerating the decline in asset prices worldwide. Statistical analysis reveals that global managers are a stabilizing force in smaller numbers; however, they become destabilizing in larger numbers. The ability to reduce risk by diversifying across markets results in excessive risk taking. If global managers exist in larger numbers, systematic over leverage may result such that a deleveraging process can lead to the spreading of financial crises.