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- Title
Credit Freezes, Equilibrium Multiplicity, and Optimal Bailouts in Financial Networks.
- Authors
Jackson, Matthew O; Pernoud, Agathe
- Abstract
We analyze how interdependencies in financial networks can lead to self-fulfilling insolvencies and multiple possible equilibrium outcomes. Multiplicity arises if a certain type of dependency cycle exists in the network. We show that finding the cheapest bailout policy that prevents self-fulfilling insolvencies is computationally hard, but that the optimal policy has intuitive features in some typical network structures. Leveraging indirect benefits ensures systemic solvency at a cost that never exceeds half of the overall shortfall. In core-periphery networks, it is optimal to bail out peripheral banks first as opposed to core banks.
- Subjects
BANKRUPTCY; FINANCIAL bailouts; FINANCIAL services industry; RATE of return; DEFAULT (Finance); BANKING industry; PORTFOLIO management (Investments)
- Publication
Review of Financial Studies, 2024, Vol 37, Issue 7, p2017
- ISSN
0893-9454
- Publication type
Article
- DOI
10.1093/rfs/hhad096