Finance and Financial Management Commons^™

Optimal Monitoring And Mitigation Of Systemic Risk In Lending Networks, Zhang Li

Open Access Dissertations

This thesis proposes optimal policies to manage systemic risk in financial networks. Given a one-period borrower-lender network in which all debts are due at the same time and have the same seniority, we address the problem of allocating a fixed amount of cash among the nodes to minimize the weighted sum of unpaid liabilities. Assuming all the loan amounts and cash flows are fixed and that there are no bankruptcy costs, we show that this problem is equivalent to a linear program. We develop a duality-based distributed algorithm to solve it which is useful for applications where it is desirable …