To Fully Net or Not to Net: Adverse Effects of Partial Multilateral Netting

Hamed Amini, Damir Filipovic and Andreea Minca
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Hamed Amini: Ecole Polytechnique Fédérale de Lausanne
Damir Filipovic: Ecole Polytechnique Fédérale de Lausanne and Swiss Finance Institute
Andreea Minca: Cornell University

No 14-63, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study a financial network where forced liquidations of an illiquid asset have a negative impact on its price, thus reinforcing network contagion. We prove uniqueness of the clearing asset price and liability payments under no, partial, and full multilateral netting of interbank liabilities. We show that partial versus full multilateral netting increases bank shortfall, and reduces clearing asset price and aggregate bank surplus. We also show that partial multilateral netting can be worse than no netting at all.

Keywords: Over the Counter Markets; Financial Network; Partial Multilateral Netting (search for similar items in EconPapers)
JEL-codes: C44 C54 C62 G01 G18 G32 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2014-11, Revised 2015-06
New Economics Papers: this item is included in nep-net
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1463

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