Section: New Results

Control of systemic risk in a dynamic framework

Agnès Sulem, Andreea Minca (Cornell University), Hamed Amini ( J. Mack Robinson College of Business, Georgia State University) and Rui Chen have studied a Dynamic Contagion Risk Model With Recovery Features [27]. In this paper, they introduce threshold growth in the classical threshold contagion model, in which nodes have downward jumps when there is a failure of a neighboring node. Choosing the configuration model as underlying graph, they prove fluid limits for the baseline model, as well as extensions to the directed case, state-dependent inter-arrival times and the case of growth driven by upward jumps. They obtain explicit ruin probabilities for the nodes according to their characteristics: initial threshold and in- (and out-) degree. They then allow nodes to choose their connectivity by trading off link benefits and contagion risk. They define a rational equilibrium concept in which nodes choose their connectivity according to an expected failure probability of any given link, and then impose condition that the expected failure probability coincides with the actual failure probability under the optimal connectivity. Existence of an asymptotic equilibrium is shown as well as convergence of the sequence of equilibria on the finite networks. In particular, these results show that systems with higher overall growth may have higher failure probability in equilibrium.

The results have been presented in Lisbon at the COMPLEX NETWORKS 2019 conference. Rui Chen has defended his thesis in July 2019 on this topic [10].