Approximate clearing in financial networks with credit default swaps: hardness thresholds, a box algorithm, barriers, and exact solvency at bounded degree

Abstract

We study approximate clearing in financial networks with credit default swaps. For weak notions (W) and (I), we prove PPAD-hardness below a threshold approximately $0.2530$ and give a polynomial-time interval algorithm above a threshold approximately $0.2834$. On networks whose CDS writers are solvent ex ante, the corresponding bounds are $(13-\sqrt{153})/4$ and $3-2\sqrt{2}$, approximately $0.1577$ and $0.1716$. The thresholds are sharp for bounded-radius algorithms: for (I) on writer-solvent networks, and for (I) and (W) in general. On non-degenerate networks, (W) and (I) have identical hardness and tractability threshold endpoints. For exact-solvency notion (D), PPAD-hardness holds at every rational error $\varepsilon<1$ on non-degenerate networks. On a restricted unit-notional class, let $d$ be the maximum number of CDS contracts held by a core bank, counted with multiplicity. For rational $\varepsilon\in[1/2,1)$, writing $ρ=(1+\varepsilon)/(1-\varepsilon)$, the problem is polynomial-time solvable when $d<(\lceilρ\rceil+1)ρ$ and PPAD-complete otherwise. At $\varepsilon=1/3$ the boundary is $d=5$ versus $d=6$; below $\varepsilon=1/9$, degree $2$ is already PPAD-complete, while degree $1$ is exactly solvable. These degree results concern (D) and do not close the (W)/(I) approximation windows. We also establish a barrier to Pure-Circuit reductions certified by interval propagation under stated interface and auxiliary-bank restrictions. A finite-precision interval algorithm reduces writer-solvent (I) to point selection in near-stalled boxes; selection is polynomial-time when the residual matrix is symmetric or monotone on each strongly connected component. The general and writer-solvent approximation windows remain open.