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Network Valuation in Financial Systems

26 Pages Posted: 16 Jun 2016 Last revised: 29 Jul 2016

Paolo Barucca

University of Zurich - Department of Banking and Finance; London Institute for Mathematical Sciences (LIMS); IMT Institute for Advanced Studies

Marco Bardoscia

University of Zurich - Department of Banking and Finance; London Institute for Mathematical Sciences (LIMS); IMT Institute for Advanced Studies

Fabio Caccioli

University College London - Financial Computing and Analytics Group, Department of Computer Science

Marco D'Errico

University of Zurich

Gabriele Visentin

University of Zurich - Department of Banking and Finance

Stefano Battiston

University of Zurich - Department of Banking and Finance

Guido Caldarelli

IMT Alti Studi Lucca

Date Written: June 14, 2016

Abstract

We introduce a network valuation model (hereafter NEVA) for the ex-ante valuation of claims among financial institutions connected in a network of liabilities. Similar to previous work, the new framework allows to endogenously determine the recovery rate on all claims upon the default of some institutions. In addition, it also allows to account for ex-ante uncertainty on the asset values, in particular the one arising when the valuation is carried out at some time before the maturity of the claims. The framework encompasses as special cases both the ex-post approaches of Eisenberg and Noe and its previous extensions, as well as the ex-ante approaches, in the sense that each of these models can be recovered exactly for special values of the parameters. We characterize the existence and uniqueness of the solutions of the valuation problem under general conditions on how the value of each claim depends on the equity of the counterparty. Further, we define an algorithm to carry out the network valuation and we provide sufficient conditions for convergence to the maximal solution.

Keywords: Interbank Claim Valuation; Network Valuation; Financial Network; Systemic Risk; Credit Risk; Default; Contagion

JEL Classification: D85, L14, E58, G2

Suggested Citation

Barucca, Paolo and Bardoscia, Marco and Caccioli, Fabio and D'Errico, Marco and Visentin, Gabriele and Battiston, Stefano and Caldarelli, Guido, Network Valuation in Financial Systems (June 14, 2016). Available at SSRN: https://ssrn.com/abstract=2795583

Paolo Barucca (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

London Institute for Mathematical Sciences (LIMS) ( email )

35a South Street
London, Mayfair W1K 2XF
United Kingdom

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Marco Bardoscia

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

London Institute for Mathematical Sciences (LIMS) ( email )

35a South Street
London, Mayfair W1K 2XF
United Kingdom

IMT Institute for Advanced Studies ( email )

Complesso San Micheletto
Lucca, 55100
Italy

Fabio Caccioli

University College London - Financial Computing and Analytics Group, Department of Computer Science ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Marco D'Errico

University of Zurich ( email )

Andreasstrasse 15
Zurich, 8050
Switzerland

Gabriele Visentin

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse, 15
Zürich, 8050
Switzerland

Stefano Battiston

University of Zurich - Department of Banking and Finance ( email )

Andreasstrasse 15
Zürich, 8050
Switzerland

Guido Caldarelli

IMT Alti Studi Lucca ( email )

Piazza San Francesco 19
Lucca, 55100
Italy

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