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Network valuation in financial systems

Barucca, P; Bardoscia, M; Caccioli, F; D'Errico, M; Visentin, G; Caldarelli, G; Battiston, S; (2020) Network valuation in financial systems. Mathematical Finance 10.1111/mafi.12272. Green open access

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Abstract

We introduce a general model for the balance‐sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the presence of uncertainty on banks' external assets. At the same time, it also provides a natural extension of classic structural credit risk models to the case of an interconnected system. We characterize the existence and uniqueness of a valuation that maximizes individual and total equity values for all banks. We apply our model to the assessment of systemic risk and in particular for the case of stress testing. Further, we provide a fixed‐point algorithm to carry out the network valuation and the conditions for its convergence.

Type: Article
Title: Network valuation in financial systems
Open access status: An open access version is available from UCL Discovery
DOI: 10.1111/mafi.12272
Publisher version: http://dx.doi.org/10.1111/mafi.12272
Language: English
Additional information: © 2020 The Authors. Mathematical Finance published by Wiley Periodicals LLC This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distribution and reproduction in any medium, provided the original work is properly cited.
Keywords: contagion, credit risk, financial networks, mark‐to‐market losses, systemic risk
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL BEAMS
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science
UCL > Provost and Vice Provost Offices > UCL BEAMS > Faculty of Engineering Science > Dept of Computer Science
URI: https://discovery.ucl.ac.uk/id/eprint/10101301
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