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Centralized clearing mechanisms: A programming approach

Péter Csóka () and P. Jean-Jacques Herings ()
Authors registered in the RePEc Author Service: Tommy Andersson and Ola Andersson

The Journal of Mechanism and Institution Design, 2022, vol. 7, issue 1, 45-69

Abstract: We consider financial networks where agents are linked to each other by financial contracts. A centralized clearing mechanism collects the initial endowments, the liabilities and the division rules of the agents and determines the payments to be made. A division rule specifies how the assets of the agents should be rationed. Since payments made depend on payments received, we are looking for solutions to a system of equations. The set of solutions is known to have a lattice structure, leading to the existence of a least and a greatest clearing payment matrix. Previous research has shown how decentralized clearing selects the least clearing payment matrix. We present a centralized approach towards clearing in order to select the greatest clearing payment matrix. To do so, we formulate the determination of the greatest clearing payment matrix as a programming problem. When agents use proportional division rules, this programming problem corresponds to a linear programming problem. We show that for other common division rules, it can be written as an integer linear programming problem.

Keywords: Systemic risk; bankruptcy rules; integer linear programming. (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.22574/jmid.2022.12.002

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