Network effects in default clustering for large systems

DOI10.1080/1350486X.2020.1724804MaRDI QIDQ5108926zbMATH OpenOpenAlexFDO

Authors Jia Yang, Konstantinos Spiliopoulos

Publication date 6 May 2020

Published in Applied Mathematical Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1812.07645

zbMATH Keywords

default clusteringfeedbacklarge financial systemsnetwork effects

Mathematics Subject Classification ID

Financial networks (including contagion, systemic risk, regulation) (91G45) Numerical methods (including Monte Carlo methods) (91G60)

Abstract: We consider a large collection of dynamically interacting components defined on a weighted directed graph determining the impact of default of one component to another one. We prove a law of large numbers for the empirical measure capturing the evolution of the different components in the pool and from this we extract important information for quantities such as the loss rate in the overall pool as well as the mean impact on a given component from system wide defaults. A singular value decomposition of the adjacency matrix of the graph allows to coarse-grain the system by focusing on the highest eigenvalues which also correspond to the components with the highest contagion impact on the pool. Numerical simulations demonstrate the theoretical findings.

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Cited in

(6)

• Default clustering in large portfolios: typical events
• Mean field games with heterogeneous groups: application to banking systems
• Systemic risk and default clustering for large financial systems
• Short Communication: Dynamic Default Contagion in Heterogeneous Interbank Systems
• Default clustering in large pools: large deviations
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