Systemic Risk Mitigation in Financial Networks

Forthcoming in Journal of Economic Dynamics and Control

38 Pages Posted: 16 Jul 2013 Last revised: 5 Jun 2016

See all articles by Agostino Capponi

Agostino Capponi

Columbia University

Peng-Chu Chen

The University of Hong Kong

Date Written: June 23, 2015

Abstract

We propose a multi-period clearing framework, where the level of systemic risk is mitigated through provision of liquidity assistance. The interbank liability network evolves stochastically over time, and assets of defaulted banks are sold to qualified banks within the network through a first price sealed-bid auction. We find that policies targeting systemically important banks are more effective in core-periphery network structures, whereas those maximizing the total liquidity in the system are preferred in random network configurations. We assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure.

Keywords: Systemic risk, mitigation strategies, clearing payments, financial networks

JEL Classification: C63, G21, G33

Suggested Citation

Capponi, Agostino and Chen, Peng-Chu, Systemic Risk Mitigation in Financial Networks (June 23, 2015). Forthcoming in Journal of Economic Dynamics and Control, Available at SSRN: https://ssrn.com/abstract=2293426 or http://dx.doi.org/10.2139/ssrn.2293426

Agostino Capponi (Contact Author)

Columbia University ( email )

S. W. Mudd Building
New York, NY 10027
United States

Peng-Chu Chen

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

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