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Strategic default in financial networks

Allouch, Nizar, Jalloul, Maya, Duncan, Alfred (2023) Strategic default in financial networks. Games and Economic Behavior, 142 . pp. 941-954. ISSN 0899-8256. E-ISSN 1090-2473. (doi:10.1016/j.geb.2023.10.001) (KAR id:103339)

Abstract

This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria and guide regulatory intervention that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria for specific financial network structures, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.

Item Type: Article
DOI/Identification number: 10.1016/j.geb.2023.10.001
Uncontrolled keywords: systemic risk; default; financial networks; coordination games; ear decomposition; central clearing counterparty; financial regulation
Subjects: H Social Sciences
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Funders: University of Kent (https://ror.org/00xkeyj56)
SWORD Depositor: JISC Publications Router
Depositing User: JISC Publications Router
Date Deposited: 31 Oct 2023 14:11 UTC
Last Modified: 11 Jan 2024 11:11 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/103339 (The current URI for this page, for reference purposes)

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