Related papers: Optimal Bailouts in Diversified Financial Networks

We consider networks of banks with assets and liabilities. Some banks may be insolvent, and a central bank can decide which insolvent banks, if any, to bail out. We view bailouts as an optimization problem where the central bank has given…

The events of the last few years revealed an acute need for tools to systematically model and analyze large financial networks. Many applications of such tools include the forecasting of systemic failures and analyzing probable effects of…

We analyze how interdependencies between organizations in financial networks can lead to multiple possible equilibrium outcomes. A multiplicity arises if and only if there exists a certain type of dependency cycle in the network that allows…

This paper studies the problem of optimally allocating a cash injection into a financial system in distress. Given a one-period borrower-lender network in which all debts are due at the same time and have the same seniority, we address the…

We examine optimal regulation of financial networks with debt interdependencies between financial firms. We first show that firms often have an incentive to choose excessively risky portfolios and overly correlate their portfolios with…

A financial system is represented by a network, where nodes correspond to banks, and directed labeled edges correspond to debt contracts between banks. Once a payment schedule has been defined, where we assume that a bank cannot refuse a…

We study financial networks with debt contracts and credit default swaps between specific pairs of banks. Given such a financial system, we want to decide which of the banks are in default, and how much of their liabilities can these…

The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this paper we consider the problem of reducing the…

We describe the bailout of banks by governments as a Markov Decision Process (MDP) where the actions are equity investments. The underlying dynamics is derived from the network of financial institutions linked by mutual exposures, and the…

We study the problem of designing dynamic intervention policies for minimizing networked defaults in financial networks. Formally, we consider a dynamic version of the celebrated Eisenberg-Noe model of financial network liabilities and use…

In the context of containment of default contagion in financial networks, we here study a regulator that allocates pre-shock capital or liquidity buffers across banks connected by interbank liabilities and common external asset exposures.…

We study a market of investments on networks, where each agent (vertex) can invest in any enterprise linked to her, and at the same time, raise capital for her firm's enterprise from other agents she is linked to. Failing to raise…

Default risk significantly affects the corporate policies of a firm. We develop a model in which a limited liability entity subject to Poisson default shock jointly sets its dividend policy and capital structure to maximize the expected…

We consider financial networks, where banks are connected by contracts such as debts or credit default swaps. We study the clearing problem in these systems: we want to know which banks end up in a default, and what portion of their…

We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of…

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…

The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. We model the market as a random directed network, where the vertices represent financial institutions and the weighted edges…

We consider the bail-out optimal dividend problem under fixed transaction costs for a L\'evy risk model. Furthermore, we consider the version with a constraint expected net present value of injected capital. To characterize the solution to…

This paper considers an optimal control of a big financial company with debt liability under bankrupt probability constraints. The company, which faces constant liability payments and has choices to choose various production/business…

This article deals with the problem of optimal allocation of capital to corporate bonds in fixed income portfolios when there is the possibility of correlated defaults. Under fairly general assumptions for the distribution of the total net…