The Complexity of Debt Swapping

Henri Froese, Martin Hoefer and Lisa Wilhelmi

Papers from arXiv.org

Abstract: A debt swap is an elementary edge swap in a directed, weighted graph, where two edges with the same weight swap their targets. Debt swaps are a natural and appealing operation in financial networks, in which nodes are banks and edges represent debt contracts. They can improve the clearing payments and the stability of these networks. However, their algorithmic properties are not well-understood. We analyze the computational complexity of debt swapping in networks with ranking-based clearing. Our main interest lies in semi-positive swaps, in which no creditor strictly suffers and at least one strictly profits. These swaps lead to a Pareto-improvement in the entire network. We consider network optimization via sequences of $v$-improving debt swaps from which a given bank $v$ strictly profits. We show that every sequence of semi-positive $v$-improving swaps has polynomial length. In contrast, for arbitrary $v$-improving swaps, the problem of reaching a network configuration that allows no further swaps is PLS-complete. We identify cases in which short sequences of semi-positive swaps exist even without the $v$-improving property. In addition, we study reachability problems, i.e., deciding if a sequence of swaps exists between given initial and final networks. We identify a polynomial-time algorithm for arbitrary swaps, show NP-hardness for semi-positive swaps and even PSPACE-completeness for $v$-improving swaps or swaps that only maintain a lower bound on the assets of a given bank $v$. A variety of our results can be extended to arbitrary monotone clearing.

Date: 2023-02
New Economics Papers: this item is included in nep-ban and nep-net
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