Interbank lending with benchmark rates: Pareto Optima for a Class of Singular Control Games

32 Pages Posted: 29 Jan 2021 Last revised: 24 May 2021

See all articles by Rama Cont

Rama Cont

University of Oxford

Xin Guo

University of California, Berkeley - Department of Industrial Engineering and Operations Research

Renyuan Xu

Mathematical Institute, University of Oxford

Date Written: December 1, 2020

Abstract

We study a class of N-player stochastic differential games of singular control, motivated by the study of a dynamic model of interbank lending with benchmark rates. We describe Pareto optima for this game and show how they may be achieved through the intervention of a regulator, whose policy is a solution to a singular stochastic control problem. Pareto optima are characterized in terms of the solution to a new class of Skorokhod problems with piecewise-continuous free boundary.

Pareto optimal policies are shown to correspond to the enforcement of endogenous bounds on interbank lending rates.

Analytical comparison between Pareto optima and Nash equilibria for the case of two players allows quantifying the impact of regulatory intervention on the stability of the interbank rate.

Keywords: stochastic differential games, Pareto optimum, LIBOR, benchmark rates, interbank market

JEL Classification: C73, G18, G21

Suggested Citation

Cont, Rama and Guo, Xin and Xu, Renyuan, Interbank lending with benchmark rates: Pareto Optima for a Class of Singular Control Games (December 1, 2020). Available at SSRN: https://ssrn.com/abstract=3745809 or http://dx.doi.org/10.2139/ssrn.3745809

Rama Cont

University of Oxford ( email )

Mathematical Institute
Oxford, OX2 6GG
United Kingdom

HOME PAGE: http://https://www.maths.ox.ac.uk/people/rama.cont

Xin Guo

University of California, Berkeley - Department of Industrial Engineering and Operations Research ( email )

4141 Etcheverry Hall
Berkeley, CA 94720-1777
United States

Renyuan Xu (Contact Author)

Mathematical Institute, University of Oxford ( email )

Andrew Wiles Building
Radcliffe Observatory Quarter (550)
Oxford, OX2 6GG
United Kingdom

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
91
Abstract Views
304
rank
338,285
PlumX Metrics