Dynamic Default Contagion in Heterogeneous Interbank Systems
Mathematical Finance
2021-07-08 v3 Risk Management
Abstract
In this work we provide a simple setting that connects the structural modelling approach of Gai-Kapadia interbank networks with the mean-field approach to default contagion. To accomplish this we make two key contributions. First, we propose a dynamic default contagion model with endogenous early defaults for a finite set of banks, generalising the Gai-Kapadia framework. Second, we reformulate this system as a stochastic particle system leading to a limiting mean-field problem. We study the existence of these clearing systems and, for the mean-field problem, the continuity of the system response.
Cite
@article{arxiv.2010.15254,
title = {Dynamic Default Contagion in Heterogeneous Interbank Systems},
author = {Zachary Feinstein and Andreas Sojmark},
journal= {arXiv preprint arXiv:2010.15254},
year = {2021}
}