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Control of interbank contagion under partial information. (English) Zbl 1330.91191

Summary: We consider a stylized core-periphery financial network in which links lead to the creation of projects in the outside economy but make banks prone to contagion risk. The controller seeks to maximize, under budget constraints, the value of the financial system defined as the total number of projects. Under partial information on interbank links, revealed in conjunction with the spread of contagion, the optimal control problem is shown to become a Markov decision problem. We determine the optimal intervention policy by using dynamic programming. Our numerical results show that the value of the system depends on the connectivity in a nonmonotonous way: it first increases with connectivity and then decreases with connectivity. The maximum value attained depends critically on the budget of the controller. Moreover, we show that for highly connected systems, it is optimal to increase the rate of intervention in the peripheral banks rather than in core banks.

MSC:

91G99 Actuarial science and mathematical finance
91B30 Risk theory, insurance (MSC2010)
91G50 Corporate finance (dividends, real options, etc.)
90B15 Stochastic network models in operations research
90B50 Management decision making, including multiple objectives
90B10 Deterministic network models in operations research
90C40 Markov and semi-Markov decision processes
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