Tuesday, October 30, 2018

Tuesday, October 30, 2018 — 4:00 PM EDT

Systemic risk and the optimal capital requirements in a model of financial networks and fire sales

I consider an interbank network with fire sales externalities and multiple illiquid assets and study the problem of optimally trading off between capital reserves and systemic risk. I find that the problem of measuring systemic risk and the optimal capital requirements under various liquidation rules can be formulated as a convex and convex mixed integer programming. To solve the convex MIP, I offer an iterative algorithm that converges to the optimal solutions. I show the results of the methodology through numerical examples and provide implications for regulatory policies and related research topics.

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