Systemic Risk in Interbanking Networks

SIAM Journal on Financial Mathematics. Forthcoming

30 Pages Posted: 3 Apr 2015 Last revised: 15 Feb 2016

See all articles by Lijun Bo

Lijun Bo

University of Science and Technology of China (USTC)

Agostino Capponi

Columbia University - Department of Industrial Engineering and Operations Research

Date Written: April 1, 2015

Abstract

We develop a mean field model of interbanking borrowing and lending activities. Each bank borrows from or lends to other counterparties at an idiosyncratic rate, and is exposed to sudden shocks affecting the level of its monetary reserves. Using weak convergence analysis, we provide an explicit characterization of the measure-valued process associated with a large interbanking system. We use the limit process to construct law of large number approximations for systemic indicators assessing average distance to default and measuring the total volume of interbanking activities. We illustrate the predictive power and accuracy of our framework via a detailed numerical analysis, showing that indicators are sensitive to lending preferences, volatility, and occurrences of negative events.

Keywords: Interacting jump diffusions, Interbanking lending, Weak convergence, Systemic indicators, Time varying square root diffusions

JEL Classification: C50, G18, G20

Suggested Citation

Bo, Lijun and Capponi, Agostino, Systemic Risk in Interbanking Networks (April 1, 2015). SIAM Journal on Financial Mathematics. Forthcoming, Available at SSRN: https://ssrn.com/abstract=2588719

Lijun Bo

University of Science and Technology of China (USTC) ( email )

96, Jinzhai Road
Hefei, Anhui 230026
China

Agostino Capponi (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research ( email )

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