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A risk analysis for a system stabilized by a central agent

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  • Josselin Garnier
  • George Papanicolaou
  • Tzu-Wei Yang

Abstract

We formulate and analyze a multi-agent model for the evolution of individual and systemic risk in which the local agents interact with each other through a central agent who, in turn, is influenced by the mean field of the local agents. The central agent is stabilized by a bistable potential, the only stabilizing force in the system. The local agents derive their stability only from the central agent. In the mean field limit of a large number of local agents we show that the systemic risk decreases when the strength of the interaction of the local agents with the central agent increases. This means that the probability of transition from one of the two stable quasi-equilibria to the other one decreases. We also show that the systemic risk increases when the strength of the interaction of the central agent with the mean field of the local agents increases. Following the financial interpretation of such models and their behavior given in our previous paper (Garnier, Papanicolaou and Yang, SIAM J. Fin. Math. 4, 2013, 151-184), we may interpret the results of this paper in the following way. From the point of view of systemic risk, and while keeping the perceived risk of the local agents approximately constant, it is better to strengthen the interaction of the local agents with the central agent than the other way around.

Suggested Citation

  • Josselin Garnier & George Papanicolaou & Tzu-Wei Yang, 2015. "A risk analysis for a system stabilized by a central agent," Papers 1507.08333, arXiv.org, revised Aug 2015.
  • Handle: RePEc:arx:papers:1507.08333
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    File URL: http://arxiv.org/pdf/1507.08333
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    References listed on IDEAS

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    1. Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers & Justin A. Sirignano, 2015. "Large Portfolio Asymptotics For Loss From Default," Mathematical Finance, Wiley Blackwell, vol. 25(1), pages 77-114, January.
    2. Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers & Justin A. Sirignano, 2011. "Large Portfolio Asymptotics for Loss From Default," Papers 1109.1272, arXiv.org, revised Feb 2015.
    3. Paolo Dai Pra & Wolfgang J. Runggaldier & Elena Sartori & Marco Tolotti, 2007. "Large portfolio losses: A dynamic contagion model," Papers 0704.1348, arXiv.org, revised Mar 2009.
    4. Kurtz, Thomas G. & Xiong, Jie, 1999. "Particle representations for a class of nonlinear SPDEs," Stochastic Processes and their Applications, Elsevier, vol. 83(1), pages 103-126, September.
    5. Kay Giesecke & Konstantinos Spiliopoulos & Richard B. Sowers, 2011. "Default clustering in large portfolios: Typical events," Papers 1104.1773, arXiv.org, revised Feb 2013.
    6. Konstantinos Spiliopoulos & Richard B. Sowers, 2013. "Default Clustering in Large Pools: Large Deviations," Papers 1311.0498, arXiv.org, revised Feb 2015.
    7. repec:cup:cbooks:9781107023437 is not listed on IDEAS
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    Cited by:

    1. Li-Hsien Sun, 2019. "Systemic Risk and Heterogeneous Mean Field Type Interbank Network," Papers 1907.03082, arXiv.org, revised Sep 2019.

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