 Optimal Clearing Payments in a Financial Contagion ModelGiuseppe Calafiore, Giulia Fracastoro and Anton Proskurnikov Abstract: Financial networks are characterized by complex structures of mutual obligations. These obligations are fulfilled entirely or in part (when defaults occur) via a mechanism called clearing, which determines a set of payments that settle the claims by respecting rules such as limited liability, absolute priority, and proportionality (pro-rated payments). In the presence of shocks on the financial system, however, the clearing mechanism may lead to cascaded defaults and eventually to financial disaster. In this paper, we first study the clearing model under pro-rated payments of Eisenberg and Noe, and we derive novel necessary and sufficient conditions for the uniqueness of the clearing payments, valid for an arbitrary topology of the financial network. Then, we argue that the proportionality rule is one of the factors responsible for cascaded defaults, and that the overall system loss can be reduced if this rule is lifted. The proposed approach thus shifts the focus from the individual interest to the overall system's interest to control and contain adverse effects of cascaded failures, and we show that clearing payments in this setting can be computed by solving suitable convex optimization problems. Date: 2021-03, Revised 2024-02 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2103.10872 Access Statistics for this paper More papers in Papers from arXiv.org |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.