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Systemic risk models for disjoint and overlapping groups with equilibrium strategies

Author

Listed:
  • Feng Yichen

    (Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA)

  • Fouque Jean-Pierre

    (Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA)

  • Hu Ruimeng

    (Department of Mathematics, Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA)

  • Ichiba Tomoyuki

    (Department of Statistics and Applied Probability, University of California, Santa Barbara, CA 93106, USA)

Abstract

We analyze the systemic risk for disjoint and overlapping groups of financial institutions by proposing new models with realistic game features. Specifically, we generalize the systemic risk measure proposed in [F. Biagini, J.-P. Fouque, M. Frittelli and T. Meyer-Brandis, On fairness of systemic risk measures, Finance Stoch. 24 (2020), 2, 513–564] by allowing individual banks to choose their preferred groups instead of being assigned to certain groups. We introduce the concept of Nash equilibrium for these new models, and analyze the optimal solution under Gaussian distribution of the risk factor. We also provide an explicit solution for the risk allocation of the individual banks and study the existence and uniqueness of Nash equilibrium both theoretically and numerically. The developed numerical algorithm can simulate scenarios of equilibrium, and we apply it to study the banking structure with real data and show the validity of the proposed model.

Suggested Citation

  • Feng Yichen & Fouque Jean-Pierre & Hu Ruimeng & Ichiba Tomoyuki, 2023. "Systemic risk models for disjoint and overlapping groups with equilibrium strategies," Statistics & Risk Modeling, De Gruyter, vol. 40(1-2), pages 21-51, January.
    • Handle: RePEc:bpj:strimo:v:40:y:2023:i:1-2:p:21-51:n:1
    DOI: 10.1515/strm-2022-0004
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