Intervention on default contagion under partial information in a financial network

Yang Xu

PLOS ONE, 2019, vol. 14, issue 1, 1-60

Abstract: We study the optimal interventions of a regulator (a central bank or government) on the illiquidity default contagion process in a large, heterogeneous, unsecured interbank lending market. The regulator has only partial information on the interbank connections and aims to minimize the fraction of final defaults with minimal interventions. We derive the analytical results of the asymptotic optimal intervention policy and the asymptotic magnitude of default contagion in terms of the network characteristics. We extend the results of Amini, Cont and Minca’s work to incorporate interventions and adopt the dynamics of Amini, Minca and Sulem’s model to build heterogeneous networks with degree sequences and initial equity levels drawn from arbitrary distributions. Our results generate insights that the optimal intervention policy is “monotonic” in terms of the intervention cost, the closeness to invulnerability and connectivity. The regulator should prioritize interventions on banks that are systematically important or close to invulnerability. Moreover, the regulator should keep intervening on a bank once having intervened on it. Our simulation results show a good agreement with the theoretical results.

Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0209819 (text/html)
https://journals.plos.org/plosone/article/file?id= ... 09819&type=printable (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:plo:pone00:0209819

DOI: 10.1371/journal.pone.0209819

Access Statistics for this article

More articles in PLOS ONE from Public Library of Science
Bibliographic data for series maintained by plosone ().