Financial networks and optimally-sized portfolios (Q5948627)

The financial equilibrium problem consisting of multiple sectors, each of which seeks to determine the optimal size of its portfolio, along with its optimal holdings of assets as well as liabilities, is considered. The network underlying each sector's optimization problem is constructed and then the equilibrium conditions and the equivalent variational inequality formulation are given. Also, the financial network that represents the system in equilibrium is identified and the modified projection method for the computation of the equilibrium assets, liabilities, portfolio sizes and prices is proposed. The algorithm decomposes the problem into network subproblems. Finally, numerical examples illustrating the model and the computational approach are provided. This research represents a missing link in the modeling scheme of financial networks in that now we have a framework in which the size of the portfolios no longer need to be fixed but nevertheless one, obtains networks for both the individual optimization problems of the sectors, as well as, the system in equilibrium.