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arXiv · 2205.08879

Control of Dynamic Financial Networks (The Extended Version)

Giuseppe Calafiore·Giulia Fracastoro·Anton V. Proskurnikov
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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 paper 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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Giuseppe Calafiore, Giulia Fracastoro, Anton V. Proskurnikov. 2022-05-18. Control of Dynamic Financial Networks (The Extended Version). https://doi.org/10.1109/lcsys.2022.3182847

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