Particle systems with singular interaction through hitting times: application in systemic risk modeling (Q670735)

By using the mean-field approach and a structural mechanism of default contagion, the authors model the dynamics of an interconnected systems of banks. They estimate the proximity of a systemic failure (the occurrence of a significantly large default cascade) which would allow a regulator to intervene ahead of time. The times of such cascades are captured by the discontinuity points of the cumulative loss process in a limiting system. An explicit connection between the occurrence of systemic events and the internal characteristics of the banking system is also presented. The mathematical model considered by the authors is based on a system of Brownian particles with singular interaction through hitting times. The regularity of the limiting process and its local uniqueness are finally established in this paper.