Dynamic Default Contagion in Heterogeneous Interbank Systems

Zachary Feinstein and Andreas Sojmark

Papers from arXiv.org

Abstract: In this work we provide a simple setting that connects the structural modelling approach of Gai-Kapadia interbank networks with the mean-field approach to default contagion. To accomplish this we make two key contributions. First, we propose a dynamic default contagion model with endogenous early defaults for a finite set of banks, generalising the Gai-Kapadia framework. Second, we reformulate this system as a stochastic particle system leading to a limiting mean-field problem. We study the existence of these clearing systems and, for the mean-field problem, the continuity of the system response.

Date: 2020-10, Revised 2021-07
New Economics Papers: this item is included in nep-ban and nep-net
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2010.15254

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