The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this letter we consider the problem of reducing the financial contagion by introducing some targeted interventions that can mitigate the cascaded failure effects. We consider a multi-step dynamic model of clearing payments and introduce an external control term that represents corrective cash injections made by a ruling authority. The proposed control model can be cast and efficiently solved as a linear program. We show via numerical examples that the proposed approach can significantly reduce the default propagation by applying small targeted cash injections.

Control of Dynamic Financial Networks / Calafiore, Giuseppe C.; Fracastoro, Giulia; Proskurnikov, Anton V.. - In: IEEE CONTROL SYSTEMS LETTERS. - ISSN 2475-1456. - 6:(2022), pp. 3206-3211. [10.1109/LCSYS.2022.3182847]

Control of Dynamic Financial Networks

Calafiore, Giuseppe C.;Fracastoro, Giulia;Proskurnikov, Anton V.
2022

Abstract

The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this letter we consider the problem of reducing the financial contagion by introducing some targeted interventions that can mitigate the cascaded failure effects. We consider a multi-step dynamic model of clearing payments and introduce an external control term that represents corrective cash injections made by a ruling authority. The proposed control model can be cast and efficiently solved as a linear program. We show via numerical examples that the proposed approach can significantly reduce the default propagation by applying small targeted cash injections.
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11583/2968945