Geodesic
Optimal connectivity for a large financial network
Rui Chen1 ; Andreea Minca2 ; Agnès Sulem3
1 INRIA Paris, 3 rue Simone Iff, CS 42112, 75589 Paris Cedex 12, France, and Université Paris-Dauphine,
2 School of Operations Research and Information Engineering, Cornell University, Ithaca, NY 14850, USA
3 INRIA Paris, 3 rue Simone Iff, CS 42112, 75589 Paris Cedex 12, France, and Université Paris-Est
ESAIM. Proceedings, Tome 59 (2017), pp. 43-55.

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We investigate network formation for a set of financial institutions represented as nodes. Linkages are source of income, and at the same time they bear the risk of contagion. The optimal connectivity of the nodes results from a game, in which the risk of contagion depends on the choices of all nodes in the system. Our financial network model can be interpreted as a set of banks connected through funding relations, in which a node’s threshold to contagion is represented by its external funding capacity. A second interpretation is that of a set of insurers connected through reinsurance contracts, in which the threshold to contagion is represented by their capital. Our results show that when the threshold distribution across the nodes has higher variance, then, in equilibrium, the average connectivity is in general increasing, but the link failure probability decreases. This suggests that financial stability is best described in terms of the mechanism of network formation than in terms of simple statistics of the network topology like the average connectivity.
DOI : 10.1051/proc/201759043

Rui Chen 1 ; Andreea Minca 2 ; Agnès Sulem 3

1 INRIA Paris, 3 rue Simone Iff, CS 42112, 75589 Paris Cedex 12, France, and Université Paris-Dauphine,
2 School of Operations Research and Information Engineering, Cornell University, Ithaca, NY 14850, USA
3 INRIA Paris, 3 rue Simone Iff, CS 42112, 75589 Paris Cedex 12, France, and Université Paris-Est 
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     author = {Rui Chen and Andreea Minca and Agn\`es Sulem},
     title = {Optimal connectivity for a large financial network},
     journal = {ESAIM. Proceedings},
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     doi = {10.1051/proc/201759043},
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     url = {http://geodesic.mathdoc.fr/articles/10.1051/proc/201759043/}
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Rui Chen; Andreea Minca; Agnès Sulem. Optimal connectivity for a large financial network. ESAIM. Proceedings, Tome 59 (2017), pp. 43-55. doi : 10.1051/proc/201759043. http://geodesic.mathdoc.fr/articles/10.1051/proc/201759043/

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