Control of Dynamic Financial Networks (The Extended Version)

Giuseppe Calafiore, Giulia Fracastoro and Anton Proskurnikov

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Abstract: The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this paper we consider the problem of reducing the financial contagion by introducing some targeted interventions that can mitigate the cascaded failure effects. We consider a multi-step dynamic model of clearing payments and introduce an external control term that represents corrective cash injections made by a ruling authority. The proposed control model can be cast and efficiently solved as a linear program. We show via numerical examples that the proposed approach can significantly reduce the default propagation by applying small targeted cash injections.

Date: 2022-05
New Economics Papers: this item is included in nep-net
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Published in IEEE Control Systems Letters, 6, pp. 3206 - 3211, 2022

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2205.08879

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