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Strategic Default in Financial Networks

Nizar Allouch and Maya Jalloul
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Maya Jalloul: Queen Mary University of London

No 852, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: This paper investigates a model of strategic interactions in financial networks, where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Next, we develop an algorithm to find all Nash equilibria that relies on the financial network structure. Finally, we explore some policy implications to achieve efficient coordination.

Keywords: Systemic risk; default; financial networks; coordination games; central clearing; counterparty; financial regulation (search for similar items in EconPapers)
JEL-codes: C72 D53 D85 G21 G28 G33 (search for similar items in EconPapers)
Date: 2018-02-06
New Economics Papers: this item is included in nep-cdm, nep-gth, nep-mic and nep-net
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