Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/265207 
Year of Publication: 
2021
Series/Report no.: 
School of Economics Discussion Papers No. 2111
Publisher: 
University of Kent, School of Economics, Canterbury
Abstract: 
This paper investigates a model of default in financial networks where the decision by one agent on whether or not to default impacts the incentives of other agents to escape default. Agents' payoffs are determined by the clearing mechanism introduced in the seminal contribution of Eisenberg and Noe (2001). We first show the existence of a Nash equilibrium of this default game. Furthermore, we develop an algorithm to find all Nash equilibria that relies on the financial network structure. The algorithm provides a ranking for the set of Nash equilibria, which can serve as a measure of systemic risk. Finally, we show that introducing a central clearing counterparty achieves the efficient equilibrium at no additional cost.
Subjects: 
systemic risk
default
nancial networks
coordination games
central clearing counterparty
nancial regulation
JEL: 
C72
D53
D85
G21
G28
G33
Document Type: 
Working Paper

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