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.File | Dimensione | Formato | |
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https://hdl.handle.net/11583/2968945