An Adaptive Learning Agent Approach to Interbank Market Liquidity Hoarding Risk

This paper investigates how learning agents perform in inter-bank lending markets. Using policy gradient reinforcement learning agents, we demonstrate the adaptive learning banks can endogenously form liquidity hoarding phenomenon under an exogenous shock to the system. We also simulate the relationship lending using temporal difference, finding enhanced inter-bank lending relationship during financial crisis. Then we incorporate fire sales and study how fire sales would affect inter-bank lending market dynamics, and the results show that fire sales amplify liquidity hoarding under a distressed shock.