Full Payment Algorithm

19 Pages Posted: 22 Mar 2019

Date Written: February 26, 2019

Abstract

Clearing payments between firms are usually computed under the assumption that firms that cannot fully meet their obligations exhaust their cash resources to make partial payments. In practice, however, firms might wait and see whether they receive payments that would help them to meet their obligations in full before making any payments themselves, thereby avoiding partial payments. In this paper, we model this situation by introducing the Full Payment Algorithm (FPA). We fully characterize the steady state of the FPA, and we prove necessary and sufficient conditions under which it is equivalent to the widely used Eisenberg and Noe model.

Keywords: Financial Networks, Systemic Risk, Clearing Algorithm

JEL Classification: C60, G29

Suggested Citation

Bardoscia, Marco and Ferrara, Gerardo and Vause, Nicholas and Yoganayagam, Michael, Full Payment Algorithm (February 26, 2019). Available at SSRN: https://ssrn.com/abstract=3344580 or http://dx.doi.org/10.2139/ssrn.3344580

Marco Bardoscia (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Gerardo Ferrara

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Nicholas Vause

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Michael Yoganayagam

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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