167 research outputs found
An analysis of systemic risk in alternative securities settlement architectures
This paper compares securities settlement gross and netting architectures. It studies settlement risk arising from exogenous operational delays and compares settlement failures between the two architectures as functions of the length of the settlement interval under different market conditions. While settlement failures are non monotonically related to the length of settlement cycles under both architectures, there is no clear cut ranking of which architecture delivers greater stability. We show that while, on average, netting systems seem to be more stable than gross systems, rare events may lead to contagious defaults that could affect the all system. Furthermore netting system are very sensitive to the number and initial distribution of traded shares. JEL Classification: C6, D4, G20, O33gross and net systems, Security clearing and settlement, systemic risk
Socioeconomic Networks with Long-Range Interactions
We study a modified version of a model previously proposed by Jackson and
Wolinsky to account for communicating information and allocating goods in
socioeconomic networks. In the model, the utility function of each node is
given by a weighted sum of contributions from all accessible nodes. The
weights, parameterized by the variable , decrease with distance. We
introduce a growth mechanism where new nodes attach to the existing network
preferentially by utility. By increasing , the network structure
evolves from a power-law to an exponential degree distribution, passing through
a regime characterised by shorter average path length, lower degree
assortativity and higher central point dominance. In the second part of the
paper we compare different network structures in terms of the average utility
received by each node. We show that power-law networks provide higher average
utility than Poisson random networks. This provides a possible justification
for the ubiquitousness of scale-free networks in the real world.Comment: 11 pages, 8 figures, minor correction
Patterns of consumption in a discrete choice model with asymmetric interactions
We study the consumption behaviour of an asymmetric network of heterogeneous
agents in the framework of discrete choice models with stochastic decision
rules. We assume that the interactions among agents are uniquely specified by
their ``social distance'' and consumption is driven by peering, distinction and
aspiration effects. The utility of each agent is positively or negatively
affected by the choices of other agents and consumption is driven by peering,
imitation and distinction effects. The dynamical properties of the model are
explored, by numerical simulations, using three different evolution algorithms
with: parallel, sequential and random-sequential updating rules. We analyze the
long-time behaviour of the system which, given the asymmetric nature of the
interactions, can either converge into a fixed point or a periodic attractor.
We discuss the role of symmetric versus asymmetric contributions to the utility
function and also that of idiosyncratic preferences, costs and memory in the
consumption decision of the agents.Comment: 11 pages, 9 figures, presented at "Complex Behaviour in Economics"
Aix-en-Provence 3-7 May, 2000. Minor modifications made: references added and
typos corrected. This paper is a fully revised version to the one previously
submitted as cond-mat/990913
Trading strategies in the Italian interbank market
Using a data set which includes all transactions among banks in the Italian
money market, we study their trading strategies and the dependence among them.
We use the Fourier method to compute the variance-covariance matrix of trading
strategies. Our results indicate that well defined patterns arise. Two main
communities of banks, which can be coarsely identified as small and large
banks, emerge.Comment: 19 page
Real-world options: smile and residual risk
We present a theory of option pricing and hedging, designed to address
non-perfect arbitrage, market friction and the presence of `fat' tails. An
implied volatility `smile' is predicted. We give precise estimates of the
residual risk associated with optimal (but imperfect) hedging.Comment: 11 pages,Latex, 5 figures (appended as uuencoded compressed tar
-file
The Impact of Heterogeneous Trading Rules on the Limit Order Book and Order Flows
In this paper we develop a model of an order-driven market where traders set bids and asks and post market or limit orders according to exogenously fixed rules. The model seeks to capture a number of features suggested by recent empirical analysis of limit order data, such as; fat-tailed distribution of limit order placement from current bid/ask; fat-tailed distribution of order execution-time; fat-tailed distribution of orders stored in the order book; long memory in the signs (buy or sell) of trades. The model developed here extends the earlier one of Chiarella and Iori (2002) in several important aspects, in particular agents have heterogenous time horizons and can submit orders of sizes larger than one, determined either by utility maximisation or by a random selection procedure. We analyze the impact of chartist and fundamentalist strategies on the determination of both the placement level and the placement size, on the shape of the book, the distribution of orders at different prices, and the distribution of their execution time. We compare the results of model simulations with real market data.
Criticality in a model of banking crises
An interbank market lets participants pool the risk arising from the
combination of illiquid investments and random withdrawals by depositors. But
it also creates the potential for one bank's failure to trigger off avalanches
of further failures. We simulate a model of interbank lending to study the
interplay of these two effects. We show that when banks are similar in size and
exposure to risk, avalanche effects are small so that widening the interbank
market leads to more stability. But as heterogeneity increases, avalanche
effects become more important. By varying the heterogeneity and connectivity
across banks, the system enters a critical regime with a power law distribution
of avalanche sizes.Comment: presented at the conference Application of Physics in Economic
Modelling, February 8 - 10, 2001, Pragu
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