A Dynamic Default Contagion Model: From Eisenberg-Noe to the Mean Field

Zachary Feinstein and Andreas Sojmark

Papers from arXiv.org

Abstract: In this work we introduce a model of default contagion that combines the approaches of Eisenberg-Noe interbank networks and dynamic mean field interactions. The proposed contagion mechanism provides an endogenous rule for early defaults in a network of financial institutions. The main result is to demonstrate a mean field interaction that can be found as the limit of the finite bank system generated from a finite Eisenberg-Noe style network. In this way, we connect two previously disparate frameworks for systemic risk, and in turn we provide a bridge for exploiting recent advances in mean field analysis when modelling systemic risk. The mean field limit is shown to be well-posed and is identified as a certain conditional McKean-Vlasov type problem that respects the original network topology under suitable assumptions.

Date: 2019-12
New Economics Papers: this item is included in nep-ban, nep-net and nep-rmg
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1912.08695

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