Proportional clearing mechanisms in financial systems: an axiomatic approach

Pedro Calleja () and Francesc Llerena ()
Additional contact information
Pedro Calleja: Universitat de Barcelona
Francesc Llerena: Universitat Rovira i Virgili

No 2023/442, UB School of Economics Working Papers from University of Barcelona School of Economics

Abstract: When a financial network collapses, how should mutual obligations among all agents be cleared? We study this problem taking an axiomatic approach and provide the first characterization of the family of rules based on the principle of proportionality in the entire domain of financial systems. A previous attempt to address this issue was done by Csóka and Herings (2021), but in a tight context where all agents dispose of strictly positive initial endowments. We show that their properties, when accommodated to the full domain of financial systems, no longer characterize the set of proportional rules. To overcome this drawback, we formulate new properties emphasizing the value of equity of the firms in the network. In particular, we show that a clearing mechanism satisfies compatilibity, limited liability, absolute priority, equity continuity, and non-manipulability by clones if and only if each agent is paid proportionally to the value of its claims. Remarkably, our result also holds in the framework studied by Csóka and Herings (2021).

Keywords: Financial networks; proportionality; non-manipulability; axiomatization. (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://hdl.handle.net/2445/193919 (application/pdf)
Our link check indicates that this URL is bad, the error code is: 500 read timeout (http://hdl.handle.net/2445/193919 [302 Found]--> https://diposit.ub.edu/dspace/handle/2445/193919)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ewp:wpaper:442web

Access Statistics for this paper

More papers in UB School of Economics Working Papers from University of Barcelona School of Economics Av. Diagonal 690, 08034 Barcelona. Contact information at EDIRC.
Bibliographic data for series maintained by University of Barcelona School of Economics ().