1. Credit Freezes, Equilibrium Multiplicity, and Optimal Bailouts in Financial Networks.
- Author
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Jackson, Matthew O and Pernoud, Agathe
- Subjects
BANKRUPTCY ,FINANCIAL bailouts ,FINANCIAL services industry ,RATE of return ,DEFAULT (Finance) ,BANKING industry ,PORTFOLIO management (Investments) - Abstract
We analyze how interdependencies in financial networks can lead to self-fulfilling insolvencies and multiple possible equilibrium outcomes. Multiplicity arises if a certain type of dependency cycle exists in the network. We show that finding the cheapest bailout policy that prevents self-fulfilling insolvencies is computationally hard, but that the optimal policy has intuitive features in some typical network structures. Leveraging indirect benefits ensures systemic solvency at a cost that never exceeds half of the overall shortfall. In core-periphery networks, it is optimal to bail out peripheral banks first as opposed to core banks. [ABSTRACT FROM AUTHOR]
- Published
- 2024
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