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Credit Freezes, Equilibrium Multiplicity, and Optimal Bailouts in Financial Networks.
- Source :
- Review of Financial Studies; Jul2024, Vol. 37 Issue 7, p2017-2062, 46p
- Publication Year :
- 2024
-
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]
Details
- Language :
- English
- ISSN :
- 08939454
- Volume :
- 37
- Issue :
- 7
- Database :
- Complementary Index
- Journal :
- Review of Financial Studies
- Publication Type :
- Academic Journal
- Accession number :
- 177926956
- Full Text :
- https://doi.org/10.1093/rfs/hhad096