default_clearing: Clearing Vector with Bankruptcy Costs

In systemicrisk: A Toolbox for Systemic Risk

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).

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).

Value

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

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

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)

Example output

$defaultind
[1] 1 1 0

$clearingvec
[1] 1.473214 1.419643 1.500000

$defaultind
[1] 1 1 1

$clearingvec
[1] 0.5020200 0.5147049 0.5653806

systemicrisk documentation built on May 2, 2019, 9:26 a.m.