An SPDE model for systemic risk with endogenous contagion
From MaRDI portal
Publication:1999595
Abstract: We propose a dynamic mean field model for `systemic risk' in large financial systems, which we derive from a system of interacting diffusions on the positive half-line with an absorbing boundary at the origin. These diffusions represent the distances-to-default of financial institutions and absorption at zero corresponds to default. As a way of modelling correlated exposures and herd behaviour, we consider a common source of noise and a form of mean-reversion in the drift. Moreover, we introduce an endogenous contagion mechanism whereby the default of one institution can cause a drop in the distances-to-default of the other institutions. In this way, we aim to capture key `system-wide' effects on risk. The resulting mean field limit is characterized uniquely by a nonlinear SPDE on the half-line with a Dirichlet boundary condition. The density of this SPDE gives the conditional law of a non-standard `conditional' McKean--Vlasov diffusion, for which we provide a novel upper Dirichlet heat kernel type estimate that is essential to the proofs. Depending on the realizations of the common noise and the rate of mean reversion, the SPDE can exhibit rapid accelerations in the loss of mass at the boundary. In other words, the contagion mechanism can give rise to periods of significant systemic default clustering.
In the present paper, the authors model a large financial system by an interacting particle system, which is presented in Section 1.4. In order to make the framework as flexible as possible, they consider a more general version of this model, namely an interacting particle system of the form (2.1). Under some structural conditions (see Assumption 2.1), they show that the mean field limit is given by the nonlinear SPDE (2.3) on the half-line with a Dirichlet boundary condition; see Theorem 2.4. Furthermore, the authors derive a uniqueness result for the limit SPDE (see Theorem 2.6), which in particular implies uniqueness in law, and they show that the density of the limit SPDE is the conditional law of a conditional McKean-Vlasov diffusion equation; see Theorem 2.7. Some qualitative insights for systemic risk are discussed as well.
Recommendations
Cites work
- A McKean-Vlasov equation with positive feedback and blow-ups
- A risk analysis for a system stabilized by a central agent
- A stochastic McKean-Vlasov equation for absorbing diffusions on the half-line
- Contagion! Systemic risk in financial networks
- Default clustering in large pools: large deviations
- Default clustering in large portfolios: typical events
- Diffusion approximation of nuclear space-valued stochastic differential equations driven by Poisson random measures
- Fire sales forensics: measuring endogenous risk
- Global solvability of a networked integrate-and-fire model of McKean-Vlasov type
- scientific article; zbMATH DE number 51724 (Why is no real title available?)
- scientific article; zbMATH DE number 3467467 (Why is no real title available?)
- Inference for large financial systems
- Large deviations for a mean field model of systemic risk
- Large portfolio asymptotics for loss from default
- Mean field games and systemic risk
- Mean-field limit of a stochastic particle system smoothly interacting through threshold hitting-times and applications to neural networks with dendritic component
- Neumann and Dirichlet heat kernels in inner uniform domains
- Particle systems with a singular mean-field self-excitation. Application to neuronal networks
- Particle systems with singular interaction through hitting times: application in systemic risk modeling
- Response of Integrate-and-Fire Neurons to Noisy Inputs Filtered by Synapses with Arbitrary Timescales: Firing Rate and Correlations
- Running for the exit: distressed selling and endogenous correlation in financial markets
- Sharp regularity near an absorbing boundary for solutions to second order SPDEs in a half-line with constant coefficients
- Skorokhod's M1 topology for distribution-valued processes
- Stability in a model of interbank lending
- Stochastic evolution equations in portfolio credit modelling
- Stochastic-Process Limits
- Systemic risk and default clustering for large financial systems
- Systemic risk in financial systems
- Systemic risk in interbanking networks
- The law of large numbers for self-exciting correlated defaults
- Two-sided estimates on Dirichlet heat kernels for time-dependent parabolic operators with singular drifts in \(C^{1,\alpha }\)-domains
- Where the risks lie: a survey on systemic risk
Cited in
(36)- Large portfolio losses in a turbulent market
- Weak existence and uniqueness for McKean-Vlasov SDEs with common noise
- At the mercy of the common noise: blow-ups in a conditional McKean-Vlasov problem
- \(N\)-player games and mean-field games with smooth dependence on past absorptions
- Dynamic contagion in a banking system with births and defaults
- A McKean-Vlasov equation with positive feedback and blow-ups
- Large deviations for a mean field model of systemic risk
- Uniqueness for contagious McKean-Vlasov systems in the weak feedback regime
- Conditional distributions, exchangeable particle systems, and stochastic partial differential equations
- Semi-analytical solution of a McKean-Vlasov equation with feedback through hitting a boundary
- Optimal dividend strategies with reinsurance under contagious systemic risk
- Network effects in default clustering for large systems
- Inference for large financial systems
- Short Communication: Dynamic Default Contagion in Heterogeneous Interbank Systems
- Mean field games with absorption and common noise with a model of bank run
- Propagation of minimality in the supercooled Stefan problem
- Contagious McKean-Vlasov systems with heterogeneous impact and exposure
- Efficient parameter estimation for parabolic SPDEs based on a log-linear model for realized volatilities
- Optimal risk sharing and dividend strategies under default contagion: a semi-analytical approach
- Stochastic PDEs for large portfolios with general mean-reverting volatility processes
- A singular two-phase Stefan problem and particles interacting through their hitting times
- Parameter estimation for second-order SPDEs in multiple space dimensions
- Stability, uniqueness and existence of solutions to McKean-Vlasov SDEs: a multidimensional Yamada-Watanabe approach
- An SPDE with Robin-type boundary for a system of elastically killed diffusions on the positive half-line
- Particle systems with singular interaction through hitting times: application in systemic risk modeling
- Mean field game of mutual holding with defaultable agents, and systemic risk
- Control of McKean-Vlasov SDEs with contagion through killing at a state-dependent intensity
- Optimal control of the nonlinear stochastic Fokker-Planck equation
- Sensitivity to initial data for physical and minimal solutions of the supercooled Stefan problem
- Contagious McKean-Vlasov problems with common noise: from smooth to singular feedback through hitting times
- Dynamics of a reaction-diffusion three-species food chain model: effect of space-time white noise
- Nonlinear partial differential equations in neuroscience: from modeling to mathematical theory
- Mean field game of mutual holding
- Playing with fire? A mean-field game analysis of fire sales and systemic risk under regulatory capital constraints
- Rough stochastic analysis with jumps
- Mean field systems on networks, with singular interaction through hitting times
This page was built for publication: An SPDE model for systemic risk with endogenous contagion
Report a bug (only for logged in users!)Click here to report a bug for this page (MaRDI item Q1999595)
