 Risk trading, network topology and banking regulationStefan Thurner, Rudolf Hanel and Stefan Pichler Quantitative Finance, 2003, vol. 3, issue 4, 306-319 Abstract: In the context of understanding the nature of the risk transformation process of the financial system we propose an iterative risk-trading game between several agents who build their trading strategies based on a general utility setting. The game is studied numerically for different network topologies. Consequences of topology are shown for the wealth time-series of agents, for the safety and efficiency of various types of network. The proposed set-up allows an analysis of the effects of different approaches to banking regulation as currently suggested by the Basle Committee of Banking Supervision. We find a phase-transition-like phenomenon, where the Basle parameter plays the role of temperature and system safety serves as the order parameter. This result suggests the existence of an optimal regulation parameter. As a consequence, a tightening of the current regulatory framework does not necessarily lead to an improvement of the safety of the banking system. Moreover, we show that banking systems with local risk-sharing cooperations have higher global default rates than systems with low cyclicality. Date: 2003 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:quantf:v:3:y:2003:i:4:p:306-319 Ordering information: This journal article can be ordered from DOI: 10.1088/1469-7688/3/4/307 Access Statistics for this article Quantitative Finance is currently edited by Michael Dempster and Jim Gatheral More articles in Quantitative Finance from Taylor & Francis Journals |
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