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775. Robust Asset Liquidation Strategies in Financial Systems
Contributed abstract in session MA-51: Risk management in finance, stream Risk management in finance.
Monday, 8:30-10:00Room: M5 (building: 101)
Authors (first author is the speaker)
1. | Hongyi Jiang
|
Systems Engineering and Engineering Management, The Chinese University of Hong Kong | |
2. | Dohyun Ahn
|
Systems Engineering and Engineering Management, The Chinese University of Hong Kong |
Abstract
In this paper, we study the problem of liquidation strategies in financial networks over two periods. Financial contagion arises when substantial overlapping illiquid assets are sold at significantly depressed prices. We present a novel strategic liquidation model for a bank in financial networks, allowing for preemptive liquidation before maturity, where the uncertainty of other banks’ two-period liquidation decisions poses a challenge to risk evaluation. To address the issue, we propose a robust quantification for the liquidation income and develop the optimal liquidation strategy for maximizing the bank’s cash after liquidation under the worst-case scenario, which we refer to as the ‘maximin strategy.’ We prove that the maxmin strategy is unique and remains invariant in the presence of interbank liabilities. We further demonstrate that with the information on all banks’ liquidation strategies available, the strategic liquidation problem becomes a liquidation game whose unique Nash equilibrium is that all banks adopt their maxmin strategy. In addition, with only aggregate information on interbank liabilities, we provide a modified near-optimal strategy for weakly interconnected financial networks. Our results provide guidelines for developing robust liquidation strategies that alleviate losses from financial contagion and build insights into evaluating liquidation effects in the financial network for decision-makers.
Keywords
- Risk Analysis and Management
- Robust Optimization
- Optimization in Financial Mathematics
Status: accepted
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