Dynamics of International Financial Networks with Risk Management

43 Pages Posted: 28 Sep 2003

See all articles by Anna Nagurney

Anna Nagurney

University of Massachusetts Amherst - Isenberg School of Management - Department of Operations and Information Management

José M. Cruz

University of Massachusetts at Amherst

Date Written: July 2003

Abstract

In this paper, we develop an international financial network model in which the sources of funds and the intermediaries are multicriteria decision-makers and are concerned with both net revenue maximization and risk minimization. The model allows for both physical as well as electronic transactions and considers three tiers of decision-makers who may be located in distinct countries and may conduct their transactions in different currencies. We describe the behavior of the various decision-makers, along with their optimality conditions, and derive the variational inequality formulation of the governing equilibrium conditions. We then propose a dynamic adjustment process which yields the evolution of the financial flows and prices and demonstrate that it can be formulated as a projected dynamical system. We also provide qualitative properties including stability analysis results. Finally, we discuss a discrete-time algorithm which can be applied to track the dynamic trajectories and yields the equilibrium financial flows and prices. We illustrate both the modeling framework as well as the computational procedure with several numerical international financial network examples.

Keywords: dynamics, financial networks, international finance, financial intermediation, electronic finance, projected dynamical systems, variational inequalities

JEL Classification: G15, F3, C61, C62, C63, C72, D81

Suggested Citation

Nagurney, Anna and Cruz, José M., Dynamics of International Financial Networks with Risk Management (July 2003). Available at SSRN: https://ssrn.com/abstract=440821 or http://dx.doi.org/10.2139/ssrn.440821

Anna Nagurney (Contact Author)

University of Massachusetts Amherst - Isenberg School of Management - Department of Operations and Information Management ( email )

Amherst, MA 01003-4910
United States

José M. Cruz

University of Massachusetts at Amherst ( email )

Department of Operations & Information Management
Amherst, MA 01003
United States

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