systemicrisk (version 0.4.2)

default_clearing: Clearing Vector with Bankruptcy Costs

Description

Computes bank defaults for the clearing vector approach without and with bankruptcy costs (Eisenberg and Noe, 2001), (Rogers and Veraart, 2013).

Usage

default_clearing(L, ea, el = 0, alpha = 1, beta = 1)

Arguments

L

Liabilities matrix

ea

Vector of external assets

el

Vector of external liabilites (default 0)

alpha

1-proportional default costs on external assets in [0, 1] (default to 1).

beta

1-proportional default costs on interbank assets in [0, 1] (defaults to 1).

Value

A list consisting of a vector indicating which banks default (1=default, 0= no default) and the greatest clearing vector.

Details

Without bankruptcy costs the approach of Eisenberg and Noe (2001) is used using a linear programme. With bankruptcy costs, the implementation is based on the Greatest Clearing Vector Algorithm (GA), see Definition 3.6, Rogers & Veraart (2013).

References

Eisenberg, L. and Noe, T.H. (2001). Systemic risk in financial systems. Management Science 47, 236--249.

Rogers, L. C. G. and Veraart, L. A. M. (2013) Failure and Rescue in an Interbank Network, Management Science 59 (4), 882--898.

Examples

# NOT RUN {
ea <- c(1/2,5/8,3/4)
el <- c(3/2,1/2,1/2)
x <- 0.5
L <- matrix(c(0,x,1-x,1-x,0,x,x,1-x,0),nrow=3)
default_clearing(L,ea,el)
default_clearing(L,ea,el, alpha=0.5, beta=0.7)
# }