Financial contagion and asset liquidation strategies

This paper provides a framework for modeling the financial system with multiple illiquid assets during a crisis. This work generalizes the paper by Amini etal. (2016) by allowing for differing liquidation strategies. The main result is a proof of sufficient conditions for the existence of an equilibrium liquidation strategy with corresponding unique clearing payments and liquidation prices. An algorithm for computing the maximal clearing payments and prices is provided.

[1]  J. Staum,et al.  Counterparty Contagion in Context: Contributions to Systemic Risk , 2012 .

[2]  Hamed Amini,et al.  Uniqueness of equilibrium in a payment system with liquidation costs , 2016, Oper. Res. Lett..

[3]  D. Yao,et al.  An Optimization View of Financial Systemic Risk Modeling: The Network Effect and the Market Liquidity Effect , 2014 .

[4]  Larry Eisenberg,et al.  Systemic Risk in Financial Networks , 1999, Manag. Sci..

[5]  S. Weber,et al.  The Joint Impact of Bankruptcy Costs, Cross-Holdings and Fire Sales on Systemic Risk in Financial Networks , 2015 .

[6]  Helmut Elsinger,et al.  Financial Networks, Cross Holdings, and Limited Liability , 2007 .

[7]  J. Aubin.  Set-valued analysis , 1990 .

[8]  H. Shin,et al.  Liquidity Risk and Contagion , 2005 .

[9]  J. Goodman.  Note on Existence and Uniqueness of Equilibrium Points for Concave N-Person Games , 1965 .

[10]  R. Sundaram.  A First Course in Optimization Theory: Optimization in ℝ n , 1996 .

[11]  Helmut Elsinger,et al.  Risk Assessment for Banking Systems , 2003, Manag. Sci..

[12]  Markus K. Brunnermeier,et al.  Market Liquidity and Funding Liquidity , 2005 .

[13]  David D. Yao,et al.  Liability Concentration and Systemic Losses in Financial Networks , 2015, Oper. Res..

[14]  Kim C. Border,et al.  Infinite Dimensional Analysis: A Hitchhiker’s Guide , 1994 .

[15]  Edson Bastos e Santos,et al.  Network Structure and Systemic Risk in Banking Systems , 2010 .

[16]  Martin Larsson,et al.  Price Contagion Through Balance Sheet Linkages , 2015 .

[17]  Edson Bastos e Santos,et al.  Handbook on Systemic Risk: Network Structure and Systemic Risk in Banking Systems , 2013 .

[18]  L. C. G. Rogers,et al.  Failure and Rescue in an Interbank Network , 2011, Manag. Sci..

[19]  Handbook on Systemic Risk: Counterparty Contagion in Context: Contributions to Systemic Risk , 2013 .

[20]  Christian Upper,et al.  Simulation methods to assess the danger of contagion in interbank markets , 2011 .

[21]  Alfred Lehar.  Measuring Systemic Risk: A Risk Management Approach , 2005 .

[22]  P. Glasserman,et al.  How Likely Is Contagion in Financial Networks? , 2013 .

[23]  Chen Zhou.  Are Banks Too Big To Fail? Measuring Systemic Importance of Financial Institutions , 2009 .

[24]  Samuel Karlin,et al.  Mathematical Methods and Theory in Games, Programming, and Economics , 1961 .

[25]  R. Cont,et al.  FIRE SALES FORENSICS: MEASURING ENDOGENOUS RISK , 2016 .

[26]  M. Elliott,et al.  Financial Networks and Contagion , 2014 .

[27]  Herbert E. Scarf,et al.  The Approximation of Fixed Points of a Continuous Mapping , 1967 .

[28]  J. Yang,et al.  Network Models and Financial Stability , 2008 .

[29]  Prasanna Gai,et al.  Contagion in financial networks , 2010, Proceedings of the Royal Society A: Mathematical, Physical and Engineering Sciences.

[30]  Zachary Feinstein,et al.  The effects of leverage requirements and fire sales on financial contagion via asset liquidation strategies in financial networks , 2015, 1507.01847.

[31]  Andreea Minca,et al.  Systemic Risk and Central Clearing Counterparty Design , 2015 .

[32]  R. Cont,et al.  RUNNING FOR THE EXIT: DISTRESSED SELLING AND ENDOGENOUS CORRELATION IN FINANCIAL MARKETS , 2011 .