Towards a measure of financial fragility

A Model of Financial Fragility

This paper presents a dynamic, stochastic game-theoretic model of financial fragility. The model has two essential features. First, interrelated portfolios and payment commitments forge financial linkages among agents. Second, iid shocks to investment projects’ operations at a single date cause some projects to fail. Investors who experience losses from project failures reallocate their portfol...

Towards a measure of vulnerability, tenacity of a Graph

If we think of the graph as modeling a network, the vulnerability measure the resistance of the network to disruption of operation after the failure of certain stations or communication links. Many graph theoretical parameters have been used to describe the vulnerability of communication networks, including connectivity, integrity, toughness, binding number and tenacity.In this paper we discuss...

Governance and Financial Fragility

Bailouts and Financial Fragility

Should policy makers be prevented from bailing out investors in the event of a crisis? I study this question in a model of financial intermediation with limited commitment. When a crisis occurs, the policy maker will respond by transferring resources to those investors facing losses. The anticipation of such a “bailout” distorts ex ante incentives, leading intermediaries to become excessively i...

A stress-strength model with dependent variables to measure household financial fragility

The paper is inspired by the stress-strength models in the reliability literature, in which given the strength (Y ) and the stress (X) of a component, its reliability is measured by P (X < Y ). In this literature, X and Y are typically modeled as independent. Since in many applications such an assumption might not be realistic, we propose a copula approach in order to take into account the depe...