A Continuous-Time Model of Financial Clearing

Isaac Sonin () and Konstantin Sonin
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Isaac Sonin: University of North Carolina at Charlotte - Department of Mathematics and Statistics

No 2020-101, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: We present a simple continuous-time model of clearing in financial networks. Financial firms are represented as “tanks†filled with fluid (money), flowing in and out. Once the “pipes†connecting the “tanks†are open, the system reaches the clearing payment vector in finite time. This approach provides a simple recursive solution to a classical static model of financial clearing in bankruptcy, and suggests a practical payment mechanism. With sufficient resources, a system of mutual obligations can be restructured into an equivalent system that has a cascade structure: there is a group of banks that paid off their debts, another group that owes money only to banks in the first group, and so on. We demonstrate that the machinery of Markov chains provides a powerful method to analyze evolution of a deterministic dynamical system.

Keywords: Financial networks; clearing vector; continuous time; Markov chain; quasi-linear optimization (search for similar items in EconPapers)
JEL-codes: C61 G21 G33 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2020
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (5)

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Working Paper: A Continuous-Time Model of Financial Clearing (2020)
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