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Strategic default in financial networks

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Strategic default in financial networks. / Allouch, Nizar; Jalloul, Maya; Duncan, Alfred.
In: Games and Economic Behavior, Vol. 142, 30.11.2023, p. 941-954.

Research output: Contribution to Journal/Magazine › Journal article › peer-review

Harvard

Allouch, N, Jalloul, M & Duncan, A 2023, 'Strategic default in financial networks', Games and Economic Behavior, vol. 142, pp. 941-954. https://doi.org/10.1016/j.geb.2023.10.001

APA

Allouch, N., Jalloul, M., & Duncan, A. (2023). Strategic default in financial networks. Games and Economic Behavior, 142, 941-954. https://doi.org/10.1016/j.geb.2023.10.001

Vancouver

Allouch N, Jalloul M, Duncan A. Strategic default in financial networks. Games and Economic Behavior. 2023 Nov 30;142:941-954. Epub 2023 Oct 31. doi: 10.1016/j.geb.2023.10.001

Author

Allouch, Nizar ; Jalloul, Maya ; Duncan, Alfred. / Strategic default in financial networks. In: Games and Economic Behavior. 2023 ; Vol. 142. pp. 941-954.

Bibtex

@article{79b4bdc979c8440892235ae9f7eb9789,
title = "Strategic default in financial networks",
abstract = "This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria and guide regulatory intervention that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria for specific financial network structures, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.",
keywords = "Systemic risk, Default, Financial networks, Coordination games, Ear decomposition, Central clearing counterparty, Financial regulation",
author = "Nizar Allouch and Maya Jalloul and Alfred Duncan",
year = "2023",
month = nov,
day = "30",
doi = "10.1016/j.geb.2023.10.001",
language = "English",
volume = "142",
pages = "941--954",
journal = "Games and Economic Behavior",
issn = "0899-8256",
publisher = "ELSEVIER ACADEMIC PRESS INC",

}

RIS

TY - JOUR

T1 - Strategic default in financial networks

AU - Allouch, Nizar

AU - Jalloul, Maya

AU - Duncan, Alfred

PY - 2023/11/30

Y1 - 2023/11/30

N2 - This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria and guide regulatory intervention that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria for specific financial network structures, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.

AB - This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria and guide regulatory intervention that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria for specific financial network structures, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.

KW - Systemic risk

KW - Default

KW - Financial networks

KW - Coordination games

KW - Ear decomposition

KW - Central clearing counterparty

KW - Financial regulation

U2 - 10.1016/j.geb.2023.10.001

DO - 10.1016/j.geb.2023.10.001

M3 - Journal article

VL - 142

SP - 941

EP - 954

JO - Games and Economic Behavior

JF - Games and Economic Behavior

SN - 0899-8256

ER -