Network Valuation in Financial Systems

Abstract

We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the presence of uncertainty on banks' external assets. At the same time, it also provides a natural extension of classic structural credit risk models to the case of an interconnected system. We characterize the existence and uniqueness of a valuation that maximises individual and total equity values for all banks. We apply our model to the assessment of systemic risk, and in particular for the case of stress-testing. Further, we provide a fixed-point algorithm to carry out the network valuation and the conditions for its convergence.

23 pages, 2 figures

References in corpus (5)

• Pathways towards instability in financial networks
• Reconstruction methods for networks: the case of economic and financial systems
• Sensitivity of the Eisenberg-Noe clearing vector to individual interbank liabilities
• Network reconstruction via density sampling
• Valuation Algorithms for Structural Models of Financial Interconnectedness

Cited by in corpus (8)

• The Physics of Financial Networks
• Systemic liquidity contagion in the European interbank market
• Controlling systemic risk - network structures that minimize it and node properties to calculate it
• Dynamic Default Contagion in Heterogeneous Interbank Systems
• Critical density for network reconstruction
• Default Resilience and Worst-Case Effects in Financial Networks
• Contingent Convertible Obligations and Financial Stability
• Dimensional Reduction of Solvency Contagion Dynamics on Financial Networks