Robust Risk Quantification via Shock Propagation in Financial Networks

Dohyun Ahn (), Nan Chen () and Kyoung-Kuk Kim ()
Additional contact information
Dohyun Ahn: Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong
Nan Chen: Department of Systems Engineering and Engineering Management, The Chinese University of Hong Kong, Shatin, New Territories, Hong Kong
Kyoung-Kuk Kim: College of Business, Korea Advanced Institute of Science and Technology, Seoul 02455, Republic of Korea

Operations Research, 2024, vol. 72, issue 1, 1-18

Abstract: Given limited network information, we consider robust risk quantification under the Eisenberg–Noe model for financial networks. To be more specific, motivated by the fact that the structure of the interbank network is not completely known in practice, we propose a robust optimization approach to obtain worst-case default probabilities and associated capital requirements for a specific group of banks (e.g., systemically important financial institutions) under network information uncertainty. Using this tool, we analyze the effects of various incomplete network information structures on these worst-case quantities and provide regulatory insights into the collection of actionable network information. All claims are numerically illustrated using data from the European banking system.

Keywords: Financial Engineering; risk quantification; financial network; robust optimization; information uncertainty (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/opre.2020.0722 (application/pdf)

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:inm:oropre:v:72:y:2024:i:1:p:1-18

Access Statistics for this article

More articles in Operations Research from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().