Related papers: Credit Freezes, Equilibrium Multiplicity, and Opti…
The instability of the financial system as experienced in recent years and in previous periods is often linked to credit defaults, i.e., to the failure of obligors to make promised payments. Given the large number of credit contracts, this…
We consider the problem of determining a sequence of payments among a set of entities that clear (if possible) the liabilities among them. We formulate this as an optimal control problem, which is convex when the objective function is, and…
The 2008 financial crisis has been attributed to "excessive complexity" of the financial system due to financial innovation. We employ computational complexity theory to make this notion precise. Specifically, we consider the problem of…
A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central…
We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a…
Networked systems are susceptible to cascading failures, where the failure of an initial set of nodes propagates through the network, often leading to system-wide failures. In this work, we propose a multiplex flow network model to study…
We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the…
In this paper, we propose a technique for rebalancing link weights in decentralized credit networks. Credit networks are peer-to-peer trust-based networks that enable fast and inexpensive cross-currency transactions compared to traditional…
The latest financial crisis has painfully revealed the dangers arising from a globally interconnected financial system. Conventional approaches based on the notion of the existence of equilibrium and those which rely on statistical…
We study computational problems in financial networks of banks connected by debt contracts and credit default swaps (CDSs). A main problem is to determine \emph{clearing} payments, for instance right after some banks have been exposed to a…
Credit networks represent a way of modeling trust between entities in a network. Nodes in the network print their own currency and trust each other for a certain amount of each other's currency. This allows the network to serve as a…
In this paper we study the implications of contingent payments on the clearing wealth in a network model of financial contagion. We consider an extension of the Eisenberg-Noe financial contagion model in which the nominal interbank…
We model a network economy with three sectors: downstream firms, upstream firms, and banks. Agents are linked by productive and credit relationships so that the behavior of one agent influences the behavior of the others through network…
We develop a model of bailout stigma where accepting a bailout signals a firm's balance-sheet weakness and worsens its funding prospect. To avoid stigma, high-quality firms either withdraw from subsequent financing after receiving bailouts…
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…
In today's global economy, supply chain (SC) entities have become increasingly interconnected with demand and supply relationships due to the need for strategic outsourcing. Such interdependence among firms not only increases efficiency but…
We propose a generic system model for a special category of interdependent networks, demand-supply networks, in which the demand and the supply nodes are associated with heterogeneous loads and resources, respectively. Our model sheds a…
For an infinite-horizon continuous-time optimal stopping problem under non-exponential discounting, we look for an optimal equilibrium, which generates larger values than any other equilibrium does on the entire state space. When the…
Economic and financial networks play a crucial role in various important processes, including economic integration, globalization, and financial crises. Of particular interest is understanding whether the temporal evolution of a real…
In the era of a growing population, systemic changes to the world, and the rising risk of crises, humanity has been facing an unprecedented challenge of resource scarcity. Confronting and addressing the issues concerning the scarce…