Mathematical Finance, Stochastic Analysis and Machine Learning Seminar By Andreas Søjmark: Dynamic Default Contagion in Heterogeneous Interbank Systems

Speaker:

Andreas Søjmark, London School of Economics and Political Science

Title:

Dynamic default contagion in heterogeneous interbank systems

Abstract:

In this talk, I will propose a dynamic default contagion model for a heterogeneous interbank system on a finite time horizon with endogenous early defaults. The key idea is for the modeling to be based on stylized balance sheets, generalizing the early Gai-Kapadia framework. Next, we will show that the model can be nicely reformulated as a stochastic particle system, resembling a class of systems interacting through hitting times that have seen a surge of interest. From here, I will then present some intuitive conditions under which the large population limit points can be characterized by a certain contagious McKean-Vlasov system with a tractable structure for the heterogeneous impact and exposure. Finally, I will discuss some interesting properties of this limiting formulation.

Mathematical Finance, Stochastic Analysis and Machine Learning