Systemic Risk in Networks with a Central Node

Hamed Amini, Damir Filipović and Andreea Minca
Additional contact information
Hamed Amini: J. Mack Robinson College of Business
Damir Filipović: Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute
Andreea Minca: Cornell University

No 20-04, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We examine the effects on a financial network of clearing all contracts though a central node (CN) thereby transforming the original network into a star-shaped one. The CN is capitalized with external equity and a guaranty fund. We introduce a structural systemic risk measure that captures the shortfall of end users. We show that it is possible to simultaneously improve the expected surplus of the banks and the CN as well as decrease the shortfall of end users. We determine the CN's equity and guaranty fund policies as a Nash bargaining solution. We illustrate our findings on simulated Credit Default Swap networks compatible with aggregate market data.

Keywords: Star-shaped Networks; Central Node; Market Design; Financial Network; Contagion; Systemic Risk; Credit Default Swap Markets (search for similar items in EconPapers)
JEL-codes: C44 C54 C62 G01 G18 G32 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020-01
New Economics Papers: this item is included in nep-cta, nep-net and nep-rmg
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2004

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