Control of Dynamic Financial Networks (The Extended Version)
Abstract
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 financial contagion by introducing some targeted interventions that can mitigate the cascaded failure effects. We consider a multi-step dynamic model of clearing payments and introduce an external control term that represents corrective cash injections made by a ruling authority. The proposed control model can be cast and efficiently solved as a linear program. We show via numerical examples that the proposed approach can significantly reduce the default propagation by applying small targeted cash injections.
Keywords
Cite
@article{arxiv.2205.08879,
title = {Control of Dynamic Financial Networks (The Extended Version)},
author = {Giuseppe Calafiore and Giulia Fracastoro and Anton V. Proskurnikov},
journal= {arXiv preprint arXiv:2205.08879},
year = {2022}
}