What is it about?
We consider the cascade effects of default in financial networks, where agents have mutual claims on each other. A clearing procedure specifies how much money each agent will end up, an in particular, who will go bankrupt. We show very general conditions under which all decentralized clearing processes lead essentially to the same as a centralized clearing procedure.
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Why is it important?
As a policy implication, it is not necessary to collect and process all the sensitive data of all the agents simultaneously and run a centralized clearing procedure. Our main application is financial networks, but our results can also be applied to supply chains, international student exchange, servers that process jobs, and time banks.
Perspectives
Central clearing counterparties also face network effects of clearing. Blockchains offer the ability to validate the execution and settlement of a transaction carried out upon its network without the need for a central third party, using distributed ledgers. More details about a possible industry application I was involved: http://www.bankingtech.com/1051262/implementing-derivatives-clearing-on-distributed-ledger-technology-platforms/
Dr Péter Csóka
Read the Original
This page is a summary of: Decentralized Clearing in Financial Networks, Management Science, October 2017, INFORMS,
DOI: 10.1287/mnsc.2017.2847.
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Resources
Presentation of the paper at SAET2017
Presentation of the paper at SAET2017
A possible blockchain application of the paper
Central clearing counterparties also face network effects of clearing. Blockchains offer the ability to validate the execution and settlement of a transaction carried out upon its network without the need for a central third party, using distributed ledgers.
Contributors
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