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Strong Approximations and Irrationality in Financial Networks with Derivatives

Authors Stavros D. Ioannidis , Bart de Keijzer , Carmine Ventre

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Author Details

Stavros D. Ioannidis
  • Department of Informatics, King’s College London, UK
Bart de Keijzer
  • Department of Informatics, King’s College London, UK
Carmine Ventre
  • Department of Informatics, King’s College London, UK

Funding

  • Ventre, Carmine: Partially supported by the UKRI Trustworthy Autonomous Systems Hub (EP/V00784X/1).

Cite As Get BibTex

Stavros D. Ioannidis, Bart de Keijzer, and Carmine Ventre. Strong Approximations and Irrationality in Financial Networks with Derivatives. In 49th International Colloquium on Automata, Languages, and Programming (ICALP 2022). Leibniz International Proceedings in Informatics (LIPIcs), Volume 229, pp. 76:1-76:18, Schloss Dagstuhl – Leibniz-Zentrum für Informatik (2022) https://doi.org/10.4230/LIPIcs.ICALP.2022.76

Abstract

Financial networks model a set of financial institutions (firms) interconnected by obligations. Recent work has introduced to this model a class of obligations called credit default swaps, a certain kind of financial derivatives. The main computational challenge for such systems is known as the clearing problem, which is to determine which firms are in default and to compute their exposure to systemic risk, technically known as their recovery rates. It is known that the recovery rates form the set of fixed points of a simple function, and that these fixed points can be irrational. Furthermore, Schuldenzucker et al. (2016) have shown that finding a weakly (or "almost") approximate (rational) fixed point is PPAD-complete.
We further study the clearing problem from the point of view of irrationality and approximation strength. Firstly, we observe that weakly approximate solutions may misrepresent the actual financial state of an institution. On this basis, we study the complexity of finding a strongly (or "near") approximate solution, and show FIXP-completeness. We then study the structural properties required for irrationality, and we give necessary conditions for irrational solutions to emerge: The presence of certain types of cycles in a financial network forces the recovery rates to take the form of roots of non-linear polynomials. In the absence of a large subclass of such cycles, we study the complexity of finding an exact fixed point, which we show to be a problem close to, albeit outside of, PPAD.

Subject Classification

ACM Subject Classification
  • Theory of computation → Problems, reductions and completeness
Keywords
  • FIXP
  • Financial Networks
  • Systemic Risk

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