Clearing Payments in Financial Networks with Credit Default Swaps [Extended Abstract]

Schuldenzucker, Steffen; Seuken, Sven; Battiston, Stefano

doi:10.1145/2940716.2940791

Cited by 30 publications

(39 citation statements)

References 2 publications

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“…The uniqueness result also has some say in papers that explore other generalizations of Eisenberg and Noe's model. Consider for example the model including defaulting costs by Rogers and Veraart (2013), or the model where financial institutes reinsure themselves through credit default swaps as in Schuldenzucker et al (2016) (see also Elliott et al (2014)). Also it allows to generalize the characterization of Nash equilibria in the 2 stage game proposed by Allouch and Jalloul (2018), where the players have the choice in the first period to save or invest an amount of capital.…”

Section: Introductionmentioning

confidence: 99%

A Note on Uniqueness of Clearing Prices in Financial Systems

Koster

2019

SSRN Journal

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The Eisenberg and Noe (2001) model of the financial system is generalized to the case where default is solved by means of a bankruptcy rule. For regular financial networks a unique vector of clearing prices exists if only the bankruptcy rule is strongly monotonic. This shows uniqueness of the clearing prices on regular financial networks for the class of equal sacrifice rules by Young (1988), and many variations of the proportional rule as in Csóka and Herings (2018). This paper disentangles the role of network topology from the way defaults are solved.

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Section: Introductionmentioning

confidence: 99%

A Note on Uniqueness of Clearing Prices in Financial Systems

Koster

2019

SSRN Journal

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“…The literature that is based on this model, either extending it (Cifuentes, Ferrucci, and Shin, 2005;Shin, 2008;Rogers and Veraart, 2013;Schuldenzucker, Seuken, and Battiston, 2016), or using it to relate the number and magnitude of defaults to the network topology (Gai and Kapadia, 2010;Elliott, Golub, and Jackson, 2014;Acemoglu, Ozdaglar, and Tahbaz-Salehi, 2015;Capponi, Chen, and Yao, 2013;Glasserman and Young, 2015), or measuring systemic risk (Chen, Iyengar, and Moallemi, 2013;Demange, 2017) uses the proportional rule to determine the mutual payments by the agents. For an overview of this stream of the literature, we refer to the excellent survey by Glasserman and Young (2016).…”

Section: Introductionmentioning

confidence: 99%

An Axiomatization of the Proportional Rule in Financial Networks

Csóka

Herings

2016

SSRN Journal

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The most important rule to determine payments in real-life bankruptcy problems is the proportional rule. Many bankruptcy problems are characterized by network aspects and default may occur as a result of contagion. Indeed, in financial networks with defaulting agents, the values of the agents' assets are endogenous as they depend on the extent to which claims on other agents can be collected. These network aspects make an axiomatic analysis challenging. This paper is the first to provide an axiomatization of the proportional rule in financial networks. Our two central axioms are impartiality and non-manipulability by identical agents. The other axioms are claims boundedness, limited liability, priority of creditors, and continuity. AbstractThe most important rule to determine payments in real-life bankruptcy problems is the proportional rule. Many bankruptcy problems are characterized by network aspects and default may occur as a result of contagion. Indeed, in financial networks with defaulting agents, the values of the agents' assets are endogenous as they depend on the extent to which claims on other agents can be collected. These network aspects make an axiomatic analysis challenging. This paper is the first to provide an axiomatization of the proportional rule in financial networks. Our two central axioms are impartiality and non-manipulability by identical agents. The other axioms are claims boundedness, limited liability, priority of creditors, and continuity.

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“…The current framework does not apply straightforwardly, though, in the presence of a specific type of financial network with CDS contracts written on the very same financial institutions, as inSchuldenzucker et al (2016). 9 See, e.g.,Gros (2010), for a discussion about this interpretation of the leverage ratio within different accounting frameworks.…”

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confidence: 99%

Rethinking Financial Contagion

2016

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How, and to what extent, does an interconnected financial system endogenously amplify external shocks? This paper attempts to reconcile some apparently different views emerged after the 2008 crisis regarding the nature and the relevance of contagion in financial networks. We develop a common framework encompassing several network contagion models and show that, regardless of the shock distribution and the network topology, precise ordering relationships on the level of aggregate systemic losses hold among models. We argue that the extent of contagion crucially depends on the amount of information that each model assumes to be available to market players. Under no uncertainty about the network structure and values of external assets, the well-known Eisenberg and Noe (2001) model applies, which delivers the lowest level of contagion. This is due to a property of loss conservation: aggregate losses after contagion are equal to the losses incurred by those institutions initially hit by a shock. This property implies that many contagion analyses rule out by construction any loss amplification, treating de facto an interconnected system as a single aggregate entity, where losses are simply mutualised. Under higher levels of uncertainty, as captured for instance by the DebtRank model, losses become non-conservative and get compounded through the network. This has important policy implications: by reducing the levels of uncertainty in times of distress (e.g. by obtaining specific data on the network) policymakers would be able to move towards more conservative scenarios. Empirically, we compare the magnitude of contagion across models on a sample of the largest European banks during the years 2006-2016. In particular, we analyse contagion effects as a function of the size of the shock and the type of external assets shocked.

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Clearing Payments in Financial Networks with Credit Default Swaps [Extended Abstract]

Cited by 30 publications

References 2 publications

A Note on Uniqueness of Clearing Prices in Financial Systems

A Note on Uniqueness of Clearing Prices in Financial Systems

An Axiomatization of the Proportional Rule in Financial Networks

Rethinking Financial Contagion

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