Valuation Algorithms for Structural Models of Financial Interconnectedness

Johannes Hain and Tom Fischer

Papers from arXiv.org

Abstract: Much research in systemic risk is focused on default contagion. While this demands an understanding of valuation, fewer articles specifically deal with the existence, the uniqueness, and the computation of equilibrium prices in structural models of interconnected financial systems. However, beyond contagion research, these topics are also essential for risk-neutral pricing. In this article, we therefore study and compare valuation algorithms in the standard model of debt and equity cross-ownership which has crystallized in the work of several authors over the past one and a half decades. Since known algorithms have potentially infinite runtime, we develop a class of new algorithms, which find exact solutions in finitely many calculation steps. A simulation study for a range of financial system designs allows us to derive conclusions about the efficiency of different numerical methods under different system parameters.

Date: 2015-01
New Economics Papers: this item is included in nep-cmp
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://arxiv.org/pdf/1501.07402 Latest version (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:arx:papers:1501.07402

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().