Systemic Risk in Networks with a Central Node

Hamed Amini, Damir Filipovic, Andreea Minca

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the effects on a financial network of clearing all contracts though a central node (CN), thereby transforming the original network into a star-shaped one. The CN is capitalized with external equity and a guaranty fund. We introduce a structural systemic risk measure that captures the shortfall of end users. We show that it is possible to simultaneously improve the expected surplus of the banks and the CN as well as decrease the shortfall of end users. We determine the CN's equity and guaranty fund policies as a Nash bargaining solution. We illustrate our findings on simulated credit default swap networks compatible with aggregate market data.

Original languageEnglish (US)
Pages (from-to)60-98
Number of pages39
JournalSIAM Journal on Financial Mathematics
Volume11
Issue number1
DOIs
StatePublished - 2020
Externally publishedYes

Keywords

  • Central node
  • Contagion
  • Credit default swap markets
  • Financial network
  • Market design
  • Star-shaped networks
  • Systemic risk

ASJC Scopus subject areas

  • Numerical Analysis
  • Finance
  • Applied Mathematics

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