Systemic Risk in Networks with a Central Node

Forthcoming, SIAM Journal on Financial Mathematics

Swiss Finance Institute Research Paper No. 20-04

43 Pages Posted: 24 Jan 2020

See all articles by Hamed Amini

Hamed Amini

J. Mack Robinson College of Business

Damir Filipović

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Andreea Minca

Cornell University

Multiple version iconThere are 2 versions of this paper

Date Written: November 1, 2019

Abstract

We examine the effects on a financial network of clearing all contracts though a central node (CN) thereby transforming the original network into a star-shaped one. The CN is capitalized with external equity and a guaranty fund. We introduce a structural systemic risk measure that captures the shortfall of end users. We show that it is possible to simultaneously improve the expected surplus of the banks and the CN as well as decrease the shortfall of end users. We determine the CN's equity and guaranty fund policies as a Nash bargaining solution. We illustrate our findings on simulated Credit Default Swap networks compatible with aggregate market data.

Keywords: Star-shaped Networks, Central Node, Market Design, Financial Network, Contagion, Systemic Risk, Credit Default Swap Markets

JEL Classification: C44, C54, C62, G01, G18, G32

Suggested Citation

Amini, Hamed and Filipovic, Damir and Minca, Andreea, Systemic Risk in Networks with a Central Node (November 1, 2019). Forthcoming, SIAM Journal on Financial Mathematics, Swiss Finance Institute Research Paper No. 20-04, Available at SSRN: https://ssrn.com/abstract=3524379 or http://dx.doi.org/10.2139/ssrn.3524379

Hamed Amini

J. Mack Robinson College of Business ( email )

Georgia State University
35 Broad Street
Atlanta, GA 30303
United States

Damir Filipovic (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

Odyssea
Station 5
Lausanne, 1015
Switzerland

HOME PAGE: http://people.epfl.ch/damir.filipovic

Swiss Finance Institute

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

Andreea Minca

Cornell University ( email )

222 Rhodes Hall
Ithaca, NY NY 14853
United States

HOME PAGE: http://people.orie.cornell.edu/acm299/

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