Optimal payments to connected depositors in turbulent times: a Markov chain approach

DOI10.1155/2018/9434608MaRDI QIDQ1649540zbMATH OpenOpenAlexFDO

Authors Dávid Csercsik, Hubert János Kiss

Publication date 6 July 2018

Published in Complexity (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://doi.org/10.1155/2018/9434608

zbMATH Keywords

depositor behaviordiscrete time probabilistic modelMarkov chainnonlinear optimization problem with nonlinear constraints

Mathematics Subject Classification ID

Markov chains (discrete-time Markov processes on discrete state spaces) (60J10) Portfolio theory (91G10) Nonlinear systems in control theory (93C10) Optimal stochastic control (93E20)

Review text

Summary: We propose a discrete time probabilistic model of depositor behavior which takes into account the information flow among depositors. In each time period each depositors' current state is determined in a stochastic way, based on their previous state, the state of other connected depositors, and the strategy of the bank. The bank offers payment to impatient depositors (those who want to withdraw their funds) who accept or decline them with certain probability, depending on the offered amount. Our principal aim is to see what are the optimal offers of the bank if it wants to keep the expected chance of a bank run under a certain level and minimize its expected payments, while taking into account the connection structure of the depositors. We show that in the case of the proposed model this question results in a nonlinear optimization problem with nonlinear constraints and that the method is capable of accounting for time-varying resource limits of the bank. Optimal offers increase (a) in the degree of the depositor, (b) in the probability of being hit by a liquidity shock, and (c) in the effect of a neighboring impatient depositor.

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Cites work

• Bank Runs, Deposit Insurance, and Liquidity
• Implementing efficient allocations in a model of financial intermediation

Cited in

(2)

• scientific article; zbMATH DE number 1988033 (Why is no real title available?)
• Run theorems for low returns and large banks

Describes a project that uses

Uses Software

• OPTI
• NLopt

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