TY - UNPB
T1 - Centralized Clearing Mechanisms in Financial Networks
T2 - A Programming Approach
AU - Csoka, Peter
AU - Herings, Jean-Jacques
N1 - CentER Discussion Paper Nr. 2022-008
PY - 2022/3/17
Y1 - 2022/3/17
N2 - We consider financial networks where agents are linked to each other with financial contracts. A centralized clearing mechanism collects the initial endowments, the liabilities and the division rules of the agents and determines the payments to be made. A division rule specifies how the assets of the agents should be rationed, the four most common ones being the proportional, the priority, the constrained equal awards, and the constrained equal losses division rules. Since payments made depend on payments received, we are looking for solutions to a system of equations. The set of solutions is known to have a lattice structure, leading to the existence of a least and a greatest clearing payment matrix. Previous research has shown how decentralized clearing selects the least clearing payment matrix. We present a centralized approach towards clearing in order to select the greatest clearing payment matrix. To do so, we formulate the determination of the greatest clearing payment matrix as a programming problem. When agents use proportional division rules, this programming problem corresponds to a linear programming problem. We show that for the other common division rules, it can be written as an integer linear programming problem.
AB - We consider financial networks where agents are linked to each other with financial contracts. A centralized clearing mechanism collects the initial endowments, the liabilities and the division rules of the agents and determines the payments to be made. A division rule specifies how the assets of the agents should be rationed, the four most common ones being the proportional, the priority, the constrained equal awards, and the constrained equal losses division rules. Since payments made depend on payments received, we are looking for solutions to a system of equations. The set of solutions is known to have a lattice structure, leading to the existence of a least and a greatest clearing payment matrix. Previous research has shown how decentralized clearing selects the least clearing payment matrix. We present a centralized approach towards clearing in order to select the greatest clearing payment matrix. To do so, we formulate the determination of the greatest clearing payment matrix as a programming problem. When agents use proportional division rules, this programming problem corresponds to a linear programming problem. We show that for the other common division rules, it can be written as an integer linear programming problem.
KW - Financial networks
KW - systemic risk
KW - bankruptcy rules
KW - clearing
KW - integer linear programming
M3 - Discussion paper
VL - 2022-008
T3 - CentER Discussion Paper
BT - Centralized Clearing Mechanisms in Financial Networks
PB - CentER, Center for Economic Research
CY - Tilburg
ER -