Systemic risk in financial networks

<p>This thesis extends the literature of systemic risk in financial networks in two directions.</p> <p>First, we develop a majorization-based tool to compare financial networks in terms of systemic losses with a focus on the implications of liability concentration. Specifically, we quantify liability concentration by applying the majorization order to the liability matrix that captures the interconnectedness of banks in a financial network. We develop notions of balancing and unbalancing networks to bring out the qualitatively different implications of liability concentration on the system's loss profile. An empirical analysis of the network formed by the banking sectors of eight representative European countries suggests that the system is either unbalancing or close to it. This empirical finding, along with the majorization results, supports regulatory policies aiming at limiting the size of gross exposures to individual counterparties.</p> <p>Second, we propose a multi-period clearing framework, where the level of systemic risk is mitigated through provision of liquidity assistance. The interbank liability network evolves stochastically over time, and assets of defaulted banks are sold to qualified banks within the network through a first-price sealed-bid auction. We find that policies targeting systemically important banks are more effective in core-periphery network structures, whereas those maximizing the total liquidity in the system are preferred in random network configurations. We assess sensitivity of systemic risk to variations in interbank liabilities as well as to their correlation structure.</p>

Name thesis:degree_name

Doctor of Philosophy (PhD)

Level thesis:degree_level

Dissertation

Discipline thesis:degree_discipline

Industrial Engineering

Year

2016

Author dc:creator

• Chen, Peng-Chu

Contributors dc:contributor

• Thomas Morin
• Agostino Capponi
• Jose Figueroa-Lopez
• George Shanthikumar
• Hong Wan

• Social sciences
• Applied sciences
• Clearing payments
• Financial networks
• Interbank liabilities
• Majorization
• Mitigation strategies
• Systemic risk
• Finance and Financial Management
• Operations and Supply Chain Management

Repository record dc:identifier

https://docs.lib.purdue.edu/open_access_dissertations/743

OAI identifier oai:identifier

oai:docs.lib.purdue.edu:open_access_dissertations-1935