Centralized Clearing Mechanisms in Financial Networks: A Programming Approach

Péter Csóka and P. Jean-Jacques Herings

No 2208, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: We consider financial networks where agents are linked to each other with financial contracts. A centralized clearing mechanism collects the initial endowments, the liabilities and the division rules of the agents and determines the payments to be made. A division rule specifies how the assets of the agents should be rationed, the four most common ones being the proportional, the priority, the constrained equal awards, and the constrained equal losses division rules. Since payments made depend on payments received, we are looking for solutions to a system of equations. The set of solutions is known to have a lattice structure, leading to the existence of a least and a greatest clearing payment matrix. Previous research has shown how decentralized clearing selects the least clearing payment matrix. We present a centralized approach towards clearing in order to select the greatest clearing payment matrix. To do so, we formulate the determination of the greatest clearing payment matrix as a programming problem. When agents use proportional division rules, this programming problem corresponds to a linear programming problem. We show that for the other common division rules, it can be written as an integer linear programming problem.

Keywords: Financial networks; systemic risk; bankruptcy rules; clearing; integer linear programming (search for similar items in EconPapers)
JEL-codes: C71 G10 (search for similar items in EconPapers)
Pages: pages
Date: 2022-03
New Economics Papers: this item is included in nep-ban, nep-net and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Working Paper: Centralized Clearing Mechanisms in Financial Networks: A Programming Approach (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:has:discpr:2208

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