A Continuous-Time Model of Financial Clearing

Sonin, Isaac M.; Sonin, Konstantin

doi:10.2139/ssrn.3664060

Cited by 6 publications

(1 citation statement)

References 41 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Feinstein and Sojmark (2019) link the static model in Eisenberg and Noe (2001) to a particle system, and provide a mean field analysis of the dynamic particle system. The model studied by Sonin and Sonin (2020) is similar to ours. However, they do not study the role of liquid assets of the banks in financial crises.…”

Section: Introductionsupporting

confidence: 67%

Financial Network and Systemic Risk—A Dynamic Model

Hong¹,

Wang²,

Yao

2021

Production and Operations Management

View full text Add to dashboard Cite

We develop a dynamic model to study the systemic risk of the banking network, so as to study the dynamics of bank defaults. In contrast to the existing literature, we show that while the possibility of contagion is determined by interconnectedness of the financial network, whether a financial crisis can occur depends on the profile of the liquid assets of the banks in the system. Based on the dynamic model, we introduce a time to crisis index that allows us to predict the occurrence of a financial crisis. We then provide an intuitive measure of systemic risk. To illustrate the potential usefulness of our model, we provide an analysis of the system of twenty‐two German banks. We show how many of the banks are fundamentally weak, where the contagion effect may arise from, how strong the contagion effect is, and how significant the systemic risk is.

show abstract

Section: Introductionsupporting

confidence: 67%

Financial Network and Systemic Risk—A Dynamic Model

Hong¹,

Wang²,

Yao

2021

Production and Operations Management

View full text Add to dashboard Cite

show abstract

Price-mediated contagion with endogenous market liquidity

Cao,

Feinstein

2024

Math Finan Econ

View full text Add to dashboard Cite

Price-mediated contagion occurs when a positive feedback loop develops following a drop in asset prices which forces banks and other financial institutions to sell their holdings. Prior studies of such events fix the level of market liquidity without regards to the level of stress applied to the system. This paper introduces a framework to understand price-mediated contagion in a system where the capacity of the market to absorb liquidated assets is determined endogenously. In doing so, we construct a joint clearing system in interbank payments, asset prices, and market liquidity. We establish mild assumptions which guarantee the existence of greatest and least clearing solutions. We conclude with detailed numerical case studies which demonstrate the, potentially severe, repercussions of endogenizing the market liquidity on system risk.

show abstract