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Decentralized Clearing in Financial Networks (RM/16/005-revised-)

Author

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  • Csoka, Péter
  • Herings, P. Jean-Jacques

    (Microeconomics & Public Economics, RS: GSBE ETBC)

Abstract

We consider a situation in which agents have mutual claims on each other, summarized in a liability matrix. Agents' assets might be insufficient to satisfy their liabilities leading to defaults. In case of default, bankruptcy rules are used to specify the way agents are going to be rationed. A clearing payment matrix is a payment matrix consistent with the prevailing bankruptcy rules that satisisfies limited liability and priority of creditors. Since clearing payment matrices and the corresponding values of equity are not uniquely determined, we provide bounds on the possible levels equity can take. Unlike the existing literature, which studies centralized clearing procedures, we introduce a large class of decentralized clearing processes. We show the convergence of any such process in finitely many iterations to the least clearing payment matrix. When the unit of account is sufficiently small, all decentralized clearing processes lead essentially to the same value of equity as a centralized clearing procedure. As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure.

Suggested Citation

  • Csoka, Péter & Herings, P. Jean-Jacques, 2016. "Decentralized Clearing in Financial Networks (RM/16/005-revised-)," Research Memorandum 037, Maastricht University, Graduate School of Business and Economics (GSBE).
    • Handle: RePEc:unm:umagsb:2016037
    DOI: 10.26481/umagsb.2016037
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    References listed on IDEAS

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    Cited by:

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    2. Berlinger, Edina & Váradi, Kata & Dömötör, Barbara & Illés, Ferenc, 2016. "A tőzsdei elszámolóházak vesztesége [The loss from central clearing houses]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(9), pages 993-1010.
    3. Csóka, Péter & Havran, Dániel & Váradi, Kata, 2016. "Konferencia a pénzügyi piacok likviditásáról. Sixth Annual Financial Market Liquidity Conference, 2015 [Conference on the liquidity of financial markets. Sixth Annual Financial Market Liquidity Con," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(4), pages 461-469.
    4. Laszlo A. Koczy & Peter Biro & Balazs Sziklai, 2017. "US vs. European Apportionment Practices: The Conflict between Monotonicity and Proportionality," CERS-IE WORKING PAPERS 1716, Institute of Economics, Centre for Economic and Regional Studies.

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    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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