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Conference Papers Year : 2023

The Default Cascade Process in Stochastic Financial Networks

Abstract

We introduce and study the following default cascade process in stochastic financial networks. We consider a finite set of agents, holding claims on each other, who meet and interact pairwise with their counterparties at random times (agents meet at times of a Poisson process) and, upon meeting, update their states. If, at the meeting time, the debtor agent is solvent, the two agents continue to meet and interact. Otherwise, when a defaulted debtor agent meets its creditor agent, the creditor agent receives a random loss with distribution depending on its characteristics. In this case, the two agents stop meeting each other. Our main result consists of a precise asymptotic expression for the fraction of defaulted agents at any time, in the case of heterogeneous random financial networks, where agents meet counterparties in a sparse directed random graph, and when the meeting times are i.i.d. expo-nential random variables.
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hal-03830139 , version 1 (26-10-2022)

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Hamed Amini, Zhongyuan Cao, Agnes Sulem. The Default Cascade Process in Stochastic Financial Networks. ICAIF '23: 4th ACM International Conference on AI in Finance, Nov 2023, New York, United States. pp.227-234, ⟨10.2139/ssrn.4020598⟩. ⟨hal-03830139⟩
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