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Strategic Default in Financial Networks

Author

Listed:
  • Nizar Allouch

    (University of Kent)

  • Maya Jalloul

    (Queen Mary University of London)

Abstract

This paper investigates a model of strategic interactions in financial networks, where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Next, we develop an algorithm to find all Nash equilibria that relies on the financial network structure. Finally, we explore some policy implications to achieve efficient coordination.

Suggested Citation

  • Nizar Allouch & Maya Jalloul, 2018. "Strategic Default in Financial Networks," Working Papers 852, Queen Mary University of London, School of Economics and Finance.
    • Handle: RePEc:qmw:qmwecw:852
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    File URL: https://www.qmul.ac.uk/sef/media/econ/research/workingpapers/2017/items/wp852.pdf
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    References listed on IDEAS

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    Cited by:

    1. Panagiotis Kanellopoulos & Maria Kyropoulou & Hao Zhou, 2021. "Financial Network Games," Papers 2107.06623, arXiv.org.
    2. Matthew O. Jackson & Agathe Pernoud, 2021. "Systemic Risk in Financial Networks: A Survey," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 171-202, August.

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    More about this item

    Keywords

    Systemic risk; default; financial networks; coordination games; central clearing; counterparty; financial regulation;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation

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