Abstract
We construct a continuous time model for price-mediated contagion precipitated by a common exogenous stress to the banking book of all firms in the financial system. In this setting, firms are constrained so as to satisfy a risk-weight based capital ratio requirement. We use this model to find analytical bounds on the risk-weights for assets as a function of the market liquidity. Under these appropriate risk-weights, we find existence and uniqueness for the joint system of firm behavior and the asset prices. We further consider an analytical bound on the firm liquidations, which allows us to construct exact formulas for stress testing the financial system with deterministic or random stresses. Numerical case studies are provided to demonstrate various implications of this model and analytical bounds.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 449-463 |
| Number of pages | 15 |
| Journal | European Journal of Operational Research |
| Volume | 281 |
| Issue number | 2 |
| DOIs | |
| State | Published - Mar 1 2020 |
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All Science Journal Classification (ASJC) codes
- Information Systems and Management
- Computer Science(all)
- Modeling and Simulation
- Management Science and Operations Research
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Capital regulation under price impacts and dynamic financial contagion. / Feinstein, Zachary.
In: European Journal of Operational Research, Vol. 281, No. 2, 01.03.2020, p. 449-463.Research output: Contribution to journal › Article
TY - JOUR
T1 - Capital regulation under price impacts and dynamic financial contagion
AU - Feinstein, Zachary
PY - 2020/3/1
Y1 - 2020/3/1
N2 - We construct a continuous time model for price-mediated contagion precipitated by a common exogenous stress to the banking book of all firms in the financial system. In this setting, firms are constrained so as to satisfy a risk-weight based capital ratio requirement. We use this model to find analytical bounds on the risk-weights for assets as a function of the market liquidity. Under these appropriate risk-weights, we find existence and uniqueness for the joint system of firm behavior and the asset prices. We further consider an analytical bound on the firm liquidations, which allows us to construct exact formulas for stress testing the financial system with deterministic or random stresses. Numerical case studies are provided to demonstrate various implications of this model and analytical bounds.
AB - We construct a continuous time model for price-mediated contagion precipitated by a common exogenous stress to the banking book of all firms in the financial system. In this setting, firms are constrained so as to satisfy a risk-weight based capital ratio requirement. We use this model to find analytical bounds on the risk-weights for assets as a function of the market liquidity. Under these appropriate risk-weights, we find existence and uniqueness for the joint system of firm behavior and the asset prices. We further consider an analytical bound on the firm liquidations, which allows us to construct exact formulas for stress testing the financial system with deterministic or random stresses. Numerical case studies are provided to demonstrate various implications of this model and analytical bounds.
UR - http://www.scopus.com/inward/record.url?scp=85071991980&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85071991980&partnerID=8YFLogxK
U2 - https://doi.org/10.1016/j.ejor.2019.08.044
DO - https://doi.org/10.1016/j.ejor.2019.08.044
M3 - Article
VL - 281
SP - 449
EP - 463
JO - European Journal of Operational Research
JF - European Journal of Operational Research
SN - 0377-2217
IS - 2
ER -