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arXiv · 1611.06672

Systemic Risk and Interbank Lending

Li-Hsien Sun
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Abstract

We propose a simple model of the banking system incorporating a game feature where the evolution of monetary reserve is modeled as a system of coupled Feller diffusions. The Markov Nash equilibrium generated through minimizing the linear quadratic cost subject to Cox-Ingersoll-Ross type processes creates liquidity and deposit rate. The adding liquidity leads to a flocking effect but the deposit rate diminishes the growth rate of the total monetary reserve causing a large number of bank defaults. In addition, the corresponding Mean Field Game and the infinite time horizon stochastic game with the discount factor are also discussed.

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Li-Hsien Sun. 2016-11-21. Systemic Risk and Interbank Lending. https://doi.org/10.1007/s10957-017-1185-1

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