Systemic risk in a mean-field model of interbank lending with self-exciting shocks

Anastasia Borovykh, Andrea Pascucci and Stefano la Rovere

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Abstract: In this paper we consider a mean-field model of interacting diffusions for the monetary reserves in which the reserves are subjected to a self- and cross-exciting shock. This is motivated by the financial acceleration and fire sales observed in the market. We derive a mean-field limit using a weak convergence analysis and find an explicit measure-valued process associated with a large interbanking system. We define systemic risk indicators and derive, using the limiting process, several law of large numbers results and verify these numerically. We conclude that self-exciting shocks increase the systemic risk in the network and their presence in interbank networks should not be ignored.

Date: 2017-09, Revised 2018-06
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Citations: View citations in EconPapers (6)

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Journal Article: Systemic risk in a mean-field model of interbank lending with self-exciting shocks (2018)
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