Wednesday, February 27, 2019 | 4:00pm-5:30pm | Room 335, HSBC Business School Building

Abstract

In modern financial systems, the interconnectedness of financial institutions forms a network structure and creates possible instability of the system due to contagion and amplification of economic shocks. Understanding such instability has emerged as a major interest for risk management of the financial system since the global financial crisis in 2008. Among several measures for the instability, this talk will mainly address firm-specific default probabilities in financial networks. To be specific, based on the characterization of the shock amplification, we first obtain asymptotic behaviors of such probabilities under some distributional assumptions. Their behaviors turn out to be quite different depending on the heavy-tailedness of shock distributions. Secondly, we obtain upper and lower bounds of firm-specific default probabilities which could provide insights into the factors that affect target probabilities. In particular, we consider robust versions of upper and lower bounds when financial networks are not fully observed. Such results are practically meaningful as the complete information of financial networks is rarely available. This talk is based on a joint work with Nan Chen and Kyoung-Kuk Kim.