A lending scheme for a system of interconnected banks with probabilistic constraints of failure
Mathematical Finance
2019-10-07 v2 Risk Management
Abstract
We derive a closed form solution for an optimal control problem related to an interbank lending schemes subject to terminal probability constraints on the failure of banks which are interconnected through a financial network. The derived solution applies to a real banks network by obtaining a general solution when the aforementioned probability constraints are assumed for all the banks. We also present a direct method to compute the systemic relevance parameter for each bank within the network.
Keywords
Cite
@article{arxiv.1903.06042,
title = {A lending scheme for a system of interconnected banks with probabilistic constraints of failure},
author = {Francesco Cordoni and Luca Di Persio and Luca Prezioso},
journal= {arXiv preprint arXiv:1903.06042},
year = {2019}
}