Two axiomatizations of the pairwise netting proportional rule in financial networks

Péter Csóka and P. Jean-Jacques Herings

European Journal of Operational Research, 2025, vol. 325, issue 3, 553-567

Abstract: We consider financial networks where agents are linked to each other via mutual liabilities. In case of bankruptcy, one needs to distribute the assets of bankrupt agents over the other agents. One common approach is to first apply pairwise netting of mutual liabilities and next use the proportional rule to determine the payments based on the net liabilities. We refer to this as the pairwise netting proportional rule. The pairwise netting proportional rule satisfies the basic requirements of claims boundedness, limited liability, priority of creditors, and continuity. It also satisfies the desirable properties of net impartiality, an agent that has two creditors with the same net claim pays the same amount to both creditors on top of pairwise netting, and invariance to mitosis, an agent that splits into a number of identical agents is not affecting the payments of the other agents. We first demonstrate that if net impartiality and invariance to mitosis, together with the basic requirements, are regarded as imperative properties, then payments should be determined by the pairwise netting proportional rule. We also obtain a second axiomatization by dropping the continuity requirement and replacing invariance to mitosis by the axiom of invariance to proportional splitting, a proportional assignment of the assets and liabilities of an agent to a newly created agent, should not affect the payments of the other agents.

Keywords: Interfaces with other disciplines; Financial networks; Systemic risk; Portfolio compression; Clearing (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221725002589
Full text for ScienceDirect subscribers only

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:eee:ejores:v:325:y:2025:i:3:p:553-567

DOI: 10.1016/j.ejor.2025.04.008

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().