Network Valuation in Financial Systems

24 Pages Posted: 7 Oct 2020

See all articles by Paolo Barucca

Paolo Barucca

University College London

Marco Bardoscia

Bank of England

Fabio Caccioli

University College London

Marco D’Errico

European Central Bank (ECB)

Gabriele Visentin

University of Zurich - Institute of Mathematics

Stefano Battiston

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

Guido Caldarelli

IMT Alti Studi Lucca

Date Written: October 1, 2020

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 maximizes 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: contagion, credit risk, financial networks, mark‐to‐market losses, systemic risk

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 (October 1, 2020). Mathematical Finance, Vol. 30, Issue 4, pp. 1181-1204, 2020, Available at SSRN: https://ssrn.com/abstract=3705453 or http://dx.doi.org/10.1111/mafi.12272

Paolo Barucca (Contact Author)

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Marco Bardoscia

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Fabio Caccioli

University College London ( email )

Gower Street
London, WC1E 6BT
United Kingdom

Marco D’Errico

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Gabriele Visentin

University of Zurich - Institute of Mathematics ( email )

Switzerland

Stefano Battiston

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

Andreasstrasse 15
Zürich, 8050
Switzerland

Ca Foscari University of Venice ( email )

Cannaregio 873
Venice, 30121
Italy

Guido Caldarelli

IMT Alti Studi Lucca ( email )

Piazza San Francesco 19
Lucca, 55100
Italy

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