Network Valuation in Financial Systems

Mathematical Finance, https://doi.org/10.1111/mafi.12272, 2020

23 Pages Posted: 16 Jun 2016 Last revised: 2 Jun 2020

See all articles by Paolo Barucca

Paolo Barucca

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

Marco Bardoscia

Bank of England

Fabio Caccioli

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

Marco D'Errico

University of Zurich; European Systemic Risk Board

Gabriele Visentin

University of Zurich - Department of Banking and Finance

Guido Caldarelli

IMT Alti Studi Lucca

Stefano Battiston

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; Ca Foscari University of Venice

Date Written: June 14, 2016

Abstract

We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the presence of uncertainty on banks' external assets. At the same time, it also provides a natural extension of classic structural credit risk models to the case of an interconnected system. We characterize the existence and uniqueness of a valuation that maximises individual and total equity values for all banks. We apply our model to the assessment of systemic risk, and in particular for the case of stress-testing. Further, we provide a fixed-point algorithm to carry out the network valuation and the conditions for its convergence.

Keywords: Financial networks, Contagion, Systemic risk, Credit risk, Mark-to-market losses

JEL Classification: D85, L14, E58, G2

Suggested Citation

Barucca, Paolo and Bardoscia, Marco and Caccioli, Fabio and D'Errico, Marco and Visentin, Gabriele and Caldarelli, Guido and Battiston, Stefano, Network Valuation in Financial Systems (June 14, 2016). Mathematical Finance, https://doi.org/10.1111/mafi.12272, 2020, Available at SSRN: https://ssrn.com/abstract=2795583 or http://dx.doi.org/10.2139/ssrn.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

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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

Andreasstrasse 15
Zurich, 8050
Switzerland

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gabriele Visentin

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

Stefano Battiston

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

Andreasstrasse 15
Zürich, 8050
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

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