Systemic risk mitigation in financial networks

Agostino Capponi and Peng-Chu Chen

Journal of Economic Dynamics and Control, 2015, vol. 58, issue C, 152-166

Abstract: We propose a multi-period clearing framework, where the level of systemic risk is mitigated through the provision of liquidity assistance. The interbank liability network evolves stochastically over time, and assets of defaulted banks are sold to qualified banks within the network through a first-price sealed-bid auction. We find that policies targeting systemically important banks are more effective in core-periphery network structures, whereas those maximizing the total liquidity in the system are preferred in random network configurations. We assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure.

Keywords: Systemic risk; Financial networks; Default contagion; Mitigation policies; Lender of last resort; E32; D85; L14; L22 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (46)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:58:y:2015:i:c:p:152-166

DOI: 10.1016/j.jedc.2015.06.008

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