Systemic Risk and Interbank Lending

2016/11/21 by Sun, Li-Hsien · 2 citations
#FOS: Economics and business #Mathematical Finance (q-fin.MF)

paper · doi:10.48550/arxiv.1611.06672

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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