Optimization of Fire Sales and Borrowing in Systemic Risk
Mathematical Finance
2018-10-02 v3 Risk Management
Abstract
This paper provides a framework for modeling financial contagion in a network subject to fire sales and price impacts, but allowing for firms to borrow to cover their shortfall as well. We consider both uncollateralized and collateralized loans. The main results of this work are providing sufficient conditions for existence and uniqueness of the clearing solutions (i.e., payments, liquidations, and borrowing); in such a setting any clearing solution is the Nash equilibrium of an aggregation game.
Cite
@article{arxiv.1802.04232,
title = {Optimization of Fire Sales and Borrowing in Systemic Risk},
author = {Maxim Bichuch and Zachary Feinstein},
journal= {arXiv preprint arXiv:1802.04232},
year = {2018}
}