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Title: Design of Risk-Sharing Mechanism Related to Extreme Events
The occurrence of extreme events, either natural or man-made, puts stress on both the physical infrastructure, causing damages and failures, and the financial system. The following recovery process requires a large amount of resources from financial agents, such as insurance companies. If the demand for funds overpasses their capacity, these financial agents cannot fulfill their obligations, thus defaulting, without being able to deliver the requested funds. However, agents can share risk among each other, according to specific agreements. Our goal is to investigate the relationship between these agreements and the overall response of the physical/financial systems to extreme events and to identify the optimal set of agreements, according to some risk-based metrics. We model the system as a directed and weighted graph, where nodes represent financial agents and links agreements among these. Each node faces an external demand of funds coming from the physical assets, modeled as a random variable, that can be transferred to other nodes, via the directed edges. For a given probabilistic model of demands and structure of the graph, we evaluate metrics such as the expected number of defaults, and we identify the graph configuration which optimizes the metric. The identified graph suggests to the agents a set more » of agreements to minimize global risk. « less
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Proc. of the 19th Working Conference of the IFIP Working Group 7.5 on Reliability and Optimization of Structural Systems, ETH Zurich, Zentrum, June 26-29, 2018.
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National Science Foundation
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