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Short communication: dynamic default contagion in heterogeneous interbank systems

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  • Feinstein, Zachary
  • Sojmark, Andreas

Abstract

In this work we provide a simple setting that connects the structural modeling approach of Gai- Kapadia interbank networks with the mean-field approach to default contagion. To accomplish this we make two key contributions. First, we propose a dynamic default contagion model with endogenous early defaults for a finite set of banks, generalizing the Gai-Kapadia framework. Second, we reformulate this system as a stochastic particle system leading to a limiting mean-field problem. We study the existence of these clearing systems and, for the mean-field problem, the continuity of the system response.

Suggested Citation

  • Feinstein, Zachary & Sojmark, Andreas, 2021. "Short communication: dynamic default contagion in heterogeneous interbank systems," LSE Research Online Documents on Economics 123789, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:123789
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    References listed on IDEAS

    as
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    17. Ledger, Sean & Søjmark, Andreas, 2021. "At the mercy of the common noise: blow-ups in a conditional McKean–Vlasov Problem," LSE Research Online Documents on Economics 123787, London School of Economics and Political Science, LSE Library.
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    Citations

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    Cited by:

    1. Giuseppe C. Calafiore & Giulia Fracastoro & Anton V. Proskurnikov, 2022. "Clearing Payments in Dynamic Financial Networks," Papers 2201.12898, arXiv.org, revised May 2022.
    2. Feinstein, Zachary & Hałaj, Grzegorz, 2023. "Interbank asset-liability networks with fire sale management," Journal of Economic Dynamics and Control, Elsevier, vol. 155(C).
    3. Zachary Feinstein & Andreas Sojmark, 2021. "Contagious McKean-Vlasov systems with heterogeneous impact and exposure," Papers 2104.06776, arXiv.org, revised Sep 2022.
    4. Hamed Amini & Zhongyuan Cao & Andreea Minca & Agn`es Sulem, 2023. "Ruin Probabilities for Risk Processes in Stochastic Networks," Papers 2302.06668, arXiv.org.
    5. Matteo Citterio & Marco D'Errico & Gabriele Visentin, 2024. "Conditional Forecasting of Margin Calls using Dynamic Graph Neural Networks," Papers 2410.23275, arXiv.org.
    6. Zachary Feinstein & Andreas Sojmark, 2022. "Endogenous distress contagion in a dynamic interbank model: how possible future losses may spell doom today," Papers 2211.15431, arXiv.org, revised Aug 2024.

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    More about this item

    Keywords

    default contagion; financial networks; mean-field model; systemic risk;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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