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This paper investigates the dynamics of systemic risk in banking networks by analyzing equilibrium points and stability conditions. The focus is on a model that incorporates interactions among distressed and undistressed banks. The equilibrium points are determined by solving a reduced system of equations, considering both homogeneous and heterogeneous scenarios. Local and global stability analyses reveal conditions under which equilibrium points are stable or unstable. Numerical simulations further illustrate the dynamics of systemic risk, while the theoretical findings offer insights into the behavior of distressed banks under varying conditions. Overall, the model enhances our understanding of systemic financial risk and offers valuable insights for risk management and policymaking in the banking sector.
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Systemic risk models for disjoint and overlapping groups with equilibrium strategies
Abstract We analyze the systemic risk for disjoint and overlapping groups of financial institutions by proposing new models with realistic game features.Specifically, we generalize the systemic risk measure proposed in[F. Biagini, J.-P. Fouque, M. Frittelli and T. Meyer-Brandis, On fairness of systemic risk measures, Finance Stoch. 24 (2020), 2, 513–564]by allowing individual banks to choose their preferred groups instead of being assigned to certain groups.We introduce the concept of Nash equilibrium for these new models, and analyze the optimal solution under Gaussian distribution of the risk factor.We also provide an explicit solution for the risk allocation of the individual banks and study the existence and uniqueness of Nash equilibrium both theoretically and numerically.The developed numerical algorithm can simulate scenarios of equilibrium, and we apply it to study the banking structure with real data and show the validity of the proposed model.
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- PAR ID:
- 10428974
- Date Published:
- Journal Name:
- Statistics & Risk Modeling
- Volume:
- 40
- Issue:
- 1-2
- ISSN:
- 2193-1402
- Page Range / eLocation ID:
- 21 to 51
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.1515/strm-2022-0004
