The Default Cascade Process in Stochastic Financial Networks

12 Pages Posted: 30 Jan 2022

See all articles by Hamed Amini

Hamed Amini

Georgia State University

Zhongyuan Cao

INRIA Paris

Agnes Sulem

INRIA Paris

Date Written: January 28, 2022

Abstract


We introduce and study the following default cascade process in stochastic financial networks.

We consider a finite set of agents, holding claims on each other, who meet and interact pairwise with their counterparties at random times (agents i and j meet at times of a Poisson process) and, upon meeting, update their states. If, at the meeting time, the debtor agent is solvent, the two agents continue to meet and interact. Otherwise, when a defaulted debtor agent meets its creditor agent, the creditor agent receives a random loss with distribution depending on its characteristics. In this case, the two agents stop meeting each other.

Our main result consists of a precise asymptotic expression for the fraction of defaulted agents at any time, in the case of heterogeneous random financial networks, where agents meet counterparties in a sparse directed random graph, and when the meeting times are i.i.d. exponential random variables.

Keywords: Financial Networks, Systemic Risk, Default Cascade Process, Limit Theorems.

JEL Classification: G01, G28

Suggested Citation

Amini, Hamed and Cao, Zhongyuan and Sulem, Agnes, The Default Cascade Process in Stochastic Financial Networks (January 28, 2022). Available at SSRN: https://ssrn.com/abstract=4020598 or http://dx.doi.org/10.2139/ssrn.4020598

Hamed Amini (Contact Author)

Georgia State University ( email )

Georgia State University
Atlanta, GA 30303
United States

Zhongyuan Cao

INRIA Paris ( email )

2 rue
Simone Iff
Paris, 75589
France

Agnes Sulem

INRIA Paris ( email )

2 rue Simone Iff, CS 42112
Paris, 75589
France

HOME PAGE: http://https://www.rocq.inria.fr/mathfi/Sulem.html

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