Publication: Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks
Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks
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Schuldenzucker, S., Seuken, S., & Battiston, S. (2020). Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks. Management Science, 66(5), 1981–1998. https://doi.org/10.1287/mnsc.2019.3304
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We study financial networks and reveal a new kind of systemic risk arising from what we call default ambiguity — that is, a situation where it is impossible to decide which banks are in default. Specifically, we study the clearing problem: given a network of banks interconnected by financial contracts, determine which banks are in default and what percentage of their liabilities they can pay. Prior work has shown that when banks can only enter into debt contracts with each other, this problem always has a unique maximal solution. We f
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Citations
Schuldenzucker, S., Seuken, S., & Battiston, S. (2020). Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks. Management Science, 66(5), 1981–1998. https://doi.org/10.1287/mnsc.2019.3304
