Intervention on default contagion under partial information in a financial network.

ABSTRACT: We study the optimal interventions of a regulator (a central bank or government) on the illiquidity default contagion process in a large, heterogeneous, unsecured interbank lending market. The regulator has only partial information on the interbank connections and aims to minimize the fraction of final defaults with minimal interventions. We derive the analytical results of the asymptotic optimal intervention policy and the asymptotic magnitude of default contagion in terms of the network characteristics. We extend the results of Amini, Cont and Minca's work to incorporate interventions and adopt the dynamics of Amini, Minca and Sulem's model to build heterogeneous networks with degree sequences and initial equity levels drawn from arbitrary distributions. Our results generate insights tha

SUBMITTER: Xu Y 

PROVIDER: S-EPMC6333338 | biostudies-literature | 2019

REPOSITORIES: biostudies-literature