IDEAS home Printed from https://ideas.repec.org/a/spr/annopr/v336y2024i1d10.1007_s10479-023-05293-7.html
   My bibliography  Save this article

Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem

Author

Listed:
  • Christa Cuchiero

    (Vienna University)

  • Christoph Reisinger

    (University of Oxford)

  • Stefan Rigger

    (Vienna University)

Abstract

We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent’s control problem converges as the number of defaultable institutions goes to infinity, and that it satisfies a drift controlled version of the supercooled Stefan problem. We compute optimal strategies in feedback form by solving numerically a regularized version of the corresponding mean field control problem using a policy gradient method. Our simulations show that the central agent’s optimal strategy is to subsidise banks whose equity values lie in a non-trivial time-dependent region.

Suggested Citation

  • Christa Cuchiero & Christoph Reisinger & Stefan Rigger, 2024. "Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem," Annals of Operations Research, Springer, vol. 336(1), pages 1315-1349, May.
    • Handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05293-7
    DOI: 10.1007/s10479-023-05293-7
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s10479-023-05293-7
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s10479-023-05293-7?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:annopr:v:336:y:2024:i:1:d:10.1007_s10479-023-05293-7. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.