Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem

Christa Cuchiero (), Christoph Reisinger () and Stefan Rigger ()
Additional contact information
Christa Cuchiero: Vienna University
Christoph Reisinger: University of Oxford
Stefan Rigger: Vienna University

Annals of Operations Research, 2024, vol. 336, issue 1, No 44, 1315-1349

Abstract: Abstract We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent’s control problem converges as the number of defaultable institutions goes to infinity, and that it satisfies a drift controlled version of the supercooled Stefan problem. We compute optimal strategies in feedback form by solving numerically a regularized version of the corresponding mean field control problem using a policy gradient method. Our simulations show that the central agent’s optimal strategy is to subsidise banks whose equity values lie in a non-trivial time-dependent region.

Keywords: Systemic risk; Mean field control; Supercooled Stefan problem; Propagation of chaos; Bail-outs (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s10479-023-05293-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05293-7

Ordering information: This journal article can be ordered from
http://www.springer.com/journal/10479

DOI: 10.1007/s10479-023-05293-7

Access Statistics for this article

Annals of Operations Research is currently edited by Endre Boros

More articles in Annals of Operations Research from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().