Short communication: dynamic default contagion in heterogeneous interbank systems

Zachary Feinstein and Andreas Sojmark

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: In this work we provide a simple setting that connects the structural modeling 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, generalizing 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.

Keywords: default contagion; financial networks; mean-field model; systemic risk (search for similar items in EconPapers)
JEL-codes: C1 F3 G3 (search for similar items in EconPapers)
Date: 2021-10-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published in SIAM Journal on Financial Mathematics, 12, October, 2021, 12(4), pp. SC83-SC97. ISSN: 1945-497X

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:123789

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