Professor Capponi, Prized for His Research in Second Bar-Ilan Conference on Financial Mathematics
The Department would like to congratulate Professor Agostino Capponi. He was awarded a prized for his research on "Systemic Risk in Interbanking Networks" in the Seconf Bar-Ilan Conference on Financial Mathematics.
We develop a mean field model of interbanking borrowing and lending activities. Each bank interacts with its counterparties based on exogenously specified lending preferences, is exposed to risk coming from inflows or outflows of customer deposits, and to sudden shocks affecting the level of its monetary reserves. These shocks, capturing either positive or negative announcements regarding the overall banking sector, are modeled through a compound Poisson process. This leads to two sources of interbank correlation: (1) mean field interaction as in Fouque and Ichiba (2012), and (2) exposure to systematic factors affecting the overall banking sector.
We provide an explicit characterization of the weak limit process associated with the sequence of empirical measures driven by the interacting system of jump diffusions, and tracking the behavior of the large interbanking system. Our weak convergence result allows for a distribution of ``types'', capturing the heterogeneous behavior of the banks in the system. We construct law of large number approximations for systemic indicators, including the average distance to default, and the total volume of interbanking activities. The latter have been identified by empirical research as critical predictors of systemic distress.
The proposed framework provides a tool for assessing the sensitivity of systemic risk indicators to banking behavior, trading preferences and macroeconomic factors. It allows policy makers to design descriptive network mechanisms that can accommodate performance impacts stemming from changes in the network infrastructure and to develop prescriptive policies for mitigating systemic risk.