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Modeling Financial System with Interbank Flows, Borrowing, and Investing

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  • Aditya Maheshwari

    (Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA)

  • Andrey Sarantsev

    (Department of Mathematics and Statistics, University of Nevada, Reno, NV 89557, USA)

Abstract

In our model, private actors with interbank cash flows similar to, but more general than that by Carmona et al. (2013) borrow from the non-banking financial sector at a certain interest rate, controlled by the central bank, and invest in risky assets. Each private actor aims to maximize its expected terminal logarithmic wealth. The central bank, in turn, aims to control the overall economy by means of an exponential utility function. We solve all stochastic optimal control problems explicitly. We are able to recreate occasions such as liquidity trap. We study distribution of the number of defaults (net worth of a private actor going below a certain threshold).

Suggested Citation

  • Aditya Maheshwari & Andrey Sarantsev, 2018. "Modeling Financial System with Interbank Flows, Borrowing, and Investing," Risks, MDPI, vol. 6(4), pages 1-26, November.
    • Handle: RePEc:gam:jrisks:v:6:y:2018:i:4:p:131-:d:183121
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    References listed on IDEAS

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    1. René Carmona & Jean-Pierre Fouque & Seyyed Mostafa Mousavi & Li-Hsien Sun, 2018. "Systemic Risk and Stochastic Games with Delay," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 366-399, November.
    2. Feldman, David, 1992. "Logarithmic Preferences, Myopic Decisions, and Incomplete Information," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(4), pages 619-629, December.
    3. Rene Carmona & Jean-Pierre Fouque & Li-Hsien Sun, 2013. "Mean Field Games and Systemic Risk," Papers 1308.2172, arXiv.org.
    4. Tomoyuki Ichiba & Vassilios Papathanakos & Adrian Banner & Ioannis Karatzas & Robert Fernholz, 2009. "Hybrid Atlas models," Papers 0909.0065, arXiv.org, revised Apr 2011.
    5. Larry Eisenberg & Thomas H. Noe, 2001. "Systemic Risk in Financial Systems," Management Science, INFORMS, vol. 47(2), pages 236-249, February.
    6. Li-Hsien Sun, 2018. "Systemic Risk and Interbank Lending," Journal of Optimization Theory and Applications, Springer, vol. 179(2), pages 400-424, November.
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    Cited by:

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    2. Rakesh Arrawatia & Arun Misra & Varun Dawar & Debasish Maitra, 2019. "Bank Competition in India: Some New Evidence Using Risk-Adjusted Lerner Index Approach," Risks, MDPI, vol. 7(2), pages 1-12, April.

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