Financial asset bubbles in banking networks

DOI10.1137/18M1193189zbMATH Open1422.91798arXiv1806.01728OpenAlexW2962878016WikidataQ127953304 ScholiaQ127953304MaRDI QIDQ5227411FDOQ5227411

Authors: Francesca Biagini, Andrea Mazzon, Thilo Meyer-Brandis 

Publication date: 26 July 2019

Published in: SIAM Journal on Financial Mathematics (Search for Journal in Brave)

Abstract: We consider a banking network represented by a system of stochastic differential equations coupled by their drift. We assume a core-periphery structure, and that the banks in the core hold a bubbly asset. The banks in the periphery have not direct access to the bubble, but can take initially advantage from its increase by investing on the banks in the core. Investments are modeled by the weight of the links, which is a function of the robustness of the banks. In this way, a preferential attachment mechanism towards the core takes place during the growth of the bubble. We then investigate how the bubble distort the shape of the network, both for finite and infinitely large systems, assuming a non vanishing impact of the core on the periphery. Due to the influence of the bubble, the banks are no longer independent, and the law of large numbers cannot be directly applied at the limit. This results in a term in the drift of the diffusions which does not average out, and that increases systemic risk at the moment of the burst. We test this feature of the model by numerical simulations.

Full work available at URL: https://arxiv.org/abs/1806.01728

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zbMATH Keywords

systemic riskbubblesmean-field modelsfinancial networks

Mathematics Subject Classification ID

Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Financial applications of other theories (91G80) Actuarial science and mathematical finance (91G99)

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Cited In (3)

• The Formation of Financial Bubbles in Defaultable Markets
• Mean field games with heterogeneous groups: application to banking systems
• Liquidity induced asset bubbles via flows of ELMMs

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