Since the financial crisis in 2007-2008, the assessment and control of systemic risk in a financial network has become a major concern in finance and economics. In this talk, we study the vulnerability of a financial network based on the linear optimization model introduced by Eisenberg and Noe (2001), where the right hand side of the constraints is subject to market shock and only partial information regarding the liability matrix is revealed.
We develop a new extended sensitivity analysis to characterize the conditions under which a bank is solvent, default or bankrupted, and estimate the probability of insolvency and the probability of bankruptcy under mild conditions on the market shock and the network structure. Particularly, we show that while an increment in the social asset may not able to improve the stability of the financial system, a larger asset inequality in the system will reduce its stability. Moreover, under certain assumption on the market shock and the network structure, we show that the least stable network can be attained at some monopoly network, which also has the highest probability of insolvency. The probability of bankruptcy in the network when all the nodes receive shocks is estimated. We also study the vulnerability of a well-balanced ring network and explore the domino effect of bankruptcy in it. Numerical experiments are presented to verify the theoretical conclusions.
June 09th, 2017
10:00 ~ 12:00
Jiming Peng, University of Houston
Room 104, School of Information Management & Engineering, Shanghai University of Finance & Economics