Interbank lending with benchmark rates: Pareto optima for a class of singular control games

DOI10.1111/MAFI.12325zbMATH Open1522.91297arXiv2005.05766OpenAlexW3178291416MaRDI QIDQ6054384FDOQ6054384

Xin Guo, Rama Cont, Renyuan Xu

Publication date: 28 September 2023

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

Abstract: We analyze a class of stochastic differential games of singular control, motivated by the study of a dynamic model of interbank lending with benchmark rates. We describe Pareto optima for this game and show how they may be achieved through the intervention of a regulator, whose policy is a solution to a singular stochastic control problem. Pareto optima are characterized in terms of the solutions to a new class of Skorokhod problems with piecewise-continuous free boundary. Pareto optimal policies are shown to correspond to the enforcement of endogenous bounds on interbank lending rates. Analytical comparison between Pareto optima and Nash equilibria provides insight into the impact of regulatory intervention on the stability of interbank rates.

Full work available at URL: https://arxiv.org/abs/2005.05766

zbMATH Keywords

Nash equilibriumsingular stochastic controlSkorokhod probleminterbank marketsPareto optimumstochastic differential gameLIBOR rate

Mathematics Subject Classification ID

Stochastic games, stochastic differential games (91A15) Financial networks (including contagion, systemic risk, regulation) (91G45) Singular stochastic partial differential equations (60H17)

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