Network-Aware Strategies in Financial Systems

Authors Pál András Papp, Roger Wattenhofer



PDF
Thumbnail PDF

File

LIPIcs.ICALP.2020.91.pdf
  • Filesize: 441 kB
  • 17 pages

Document Identifiers

Author Details

Pál András Papp
  • ETH Zürich, Switzerland
Roger Wattenhofer
  • ETH Zürich, Switzerland

Cite AsGet BibTex

Pál András Papp and Roger Wattenhofer. Network-Aware Strategies in Financial Systems. In 47th International Colloquium on Automata, Languages, and Programming (ICALP 2020). Leibniz International Proceedings in Informatics (LIPIcs), Volume 168, pp. 91:1-91:17, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2020)
https://doi.org/10.4230/LIPIcs.ICALP.2020.91

Abstract

We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of the banks are in default, and how much of their liabilities these banks can pay. We study the payoff and preferences of the banks in the different solutions to this problem. We also introduce a more refined model which allows assigning priorities to payment obligations; this provides a more expressive and realistic model of real-life financial systems, while it always ensures the existence of a solution. The main focus of the paper is an analysis of the actions that a single bank can execute in a financial system in order to influence the outcome to its advantage. We show that removing an incoming debt, or donating funds to another bank can result in a single new solution that is strictly more favorable to the acting bank. We also show that increasing the bank’s external funds or modifying the priorities of outgoing payments cannot introduce a more favorable new solution into the system, but may allow the bank to remove some unfavorable solutions, or to increase its recovery rate. Finally, we show how the actions of two banks in a simple financial system can result in classical game theoretic situations like the prisoner’s dilemma or the dollar auction, demonstrating the wide expressive capability of the financial system model.

Subject Classification

ACM Subject Classification
  • Theory of computation → Network games
  • Applied computing → Economics
  • Theory of computation → Algorithmic mechanism design
Keywords
  • Financial network
  • credit default swap
  • creditor priority
  • clearing problem
  • prisoner’s dilemma
  • dollar auction

Metrics

  • Access Statistics
  • Total Accesses (updated on a weekly basis)
    0
    PDF Downloads

References

  1. Daron Acemoglu, Vasco M Carvalho, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. The network origins of aggregate fluctuations. Econometrica, 80(5):1977-2016, 2012. Google Scholar
  2. Daron Acemoglu, Asuman Ozdaglar, and Alireza Tahbaz-Salehi. Systemic risk and stability in financial networks. American Economic Review, 105(2):564-608, 2015. Google Scholar
  3. Nimalan Arinaminpathy, Sujit Kapadia, and Robert M May. Size and complexity in model financial systems. Proceedings of the National Academy of Sciences, 109(45):18338-18343, 2012. Google Scholar
  4. Marco Bardoscia, Stefano Battiston, Fabio Caccioli, and Guido Caldarelli. Pathways towards instability in financial networks. Nature Communications, 8:14416, 2017. Google Scholar
  5. Stefano Battiston, Guido Caldarelli, Robert M May, Tarik Roukny, and Joseph E Stiglitz. The price of complexity in financial networks. Proceedings of the National Academy of Sciences, 113(36):10031-10036, 2016. Google Scholar
  6. Nils Bertschinger, Martin Hoefer, and Daniel Schmand. Strategic Payments in Financial Networks. In 11th Innovations in Theoretical Computer Science Conference (ITCS 2020), volume 151 of Leibniz International Proceedings in Informatics (LIPIcs), pages 46:1-46:16, Dagstuhl, Germany, 2020. Schloss Dagstuhl-Leibniz-Zentrum fuer Informatik. Google Scholar
  7. Stéphane Dees, Jérôme Henry, and Reiner Martin. Martin. Stamp€: stress-test analytics for macroprudential purposes in the euro area. Frankfurt am Main: ECB, 2017. Google Scholar
  8. Gabrielle Demange. Contagion in financial networks: a threat index. Management Science, 64(2):955-970, 2016. Google Scholar
  9. Darrell Duffie and Haoxiang Zhu. Does a central clearing counterparty reduce counterparty risk? The Review of Asset Pricing Studies, 1(1):74-95, 2011. Google Scholar
  10. Marco D’Errico, Stefano Battiston, Tuomas Peltonen, and Martin Scheicher. How does risk flow in the credit default swap market? Journal of Financial Stability, 35:53-74, 2018. Google Scholar
  11. Larry Eisenberg and Thomas H Noe. Systemic risk in financial systems. Management Science, 47(2):236-249, 2001. Google Scholar
  12. Matthew Elliott, Benjamin Golub, and Matthew O Jackson. Financial networks and contagion. American Economic Review, 104(10):3115-53, 2014. Google Scholar
  13. Helmut Elsinger, Alfred Lehar, and Martin Summer. Risk assessment for banking systems. Management science, 52(9):1301-1314, 2006. Google Scholar
  14. Ingo Fender and Jacob Gyntelberg. Overview: global financial crisis spurs unprecedented policy actions. BIS Quarterly Review, 13(4):1-24, 2008. Google Scholar
  15. Prasanna Gai, Andrew Haldane, and Sujit Kapadia. Complexity, concentration and contagion. Journal of Monetary Economics, 58(5):453-470, 2011. Google Scholar
  16. Shizuo Kakutani et al. A generalization of brouwer’s fixed point theorem. Duke mathematical journal, 8(3):457-459, 1941. Google Scholar
  17. Matt V Leduc, Sebastian Poledna, and Stefan Thurner. Systemic risk management in financial networks with credit default swaps. Available at SSRN 2713200, 2017. Google Scholar
  18. Yee Cheng Loon and Zhaodong Ken Zhong. The impact of central clearing on counterparty risk, liquidity, and trading: Evidence from the credit default swap market. Journal of Financial Economics, 112(1):91-115, 2014. Google Scholar
  19. Matthew O'Brien. How to make money for nothing like wall street. The Atlantic (Business), October 2013. Accessed: 22. Apr, 2020. URL: https://www.theatlantic.com/business/archive/2013/10/how-to-make-money-for-nothing-like-wall-street/280825/.
  20. Martin J Osborne et al. An introduction to game theory, volume 3. Oxford university press New York, 2004. Google Scholar
  21. Leonard CG Rogers and Luitgard AM Veraart. Failure and rescue in an interbank network. Management Science, 59(4):882-898, 2013. Google Scholar
  22. Steffen Schuldenzucker, Sven Seuken, and Stefano Battiston. Clearing payments in financial networks with credit default swaps. In Proceedings of the 2016 ACM Conference on Economics and Computation, EC '16, pages 759-759, New York, NY, USA, 2016. ACM. Google Scholar
  23. Steffen Schuldenzucker, Sven Seuken, and Stefano Battiston. Finding Clearing Payments in Financial Networks with Credit Default Swaps is PPAD-complete. In 8th Innovations in Theoretical Computer Science Conference (ITCS 2017), volume 67 of Leibniz International Proceedings in Informatics (LIPIcs), pages 32:1-32:20, Dagstuhl, Germany, 2017. Schloss Dagstuhl-Leibniz-Zentrum fuer Informatik. Google Scholar
  24. Martin Shubik. The dollar auction game: A paradox in noncooperative behavior and escalation. Journal of conflict Resolution, 15(1):109-111, 1971. Google Scholar
  25. Stefania Vitali, James B Glattfelder, and Stefano Battiston. The network of global corporate control. PloS one, 6(10):e25995, 2011. Google Scholar
Questions / Remarks / Feedback
X

Feedback for Dagstuhl Publishing


Thanks for your feedback!

Feedback submitted

Could not send message

Please try again later or send an E-mail