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Banks as Tanks: A Continuous-Time Model of Financial Clearing

Isaac M. Sonin and Konstantin Sonin ()

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Abstract: We present a simple model of clearing in financial networks in continuous time. In the model, firms (banks) are represented as reservoirs (tanks) with liquid (money) flowing in and out. This approach provides a simple recursive solution to a classical static model of financial clearing introduced by Eisenberg and Noe (2001). The dynamic structure of our model helps to answer other related questions and, potentially, opens the way to handle more complicated dynamic financial networks. Also, our approach provides a useful tool for solving nonlinear equations involving linear system and max min operations similar to the Bellman equation for the optimal stopping of Markov chains and other optimization problems.

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Date: 2017-05, Revised 2017-06
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