Clearing Systems and the Transmission of Systemic Risk

Noe, Thomas (1999) Clearing Systems and the Transmission of Systemic Risk. In: Discrete Mathematics and Theoretical Computer Science, 27 April, 1999, Piscataway, New Jersey.

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One of the most pervasive aspects of the contemporary financial environment is the rich network of interconnections between firms. Although financial liabilities owed by one firm to another are usually modeled as unidirectional obligations dependent only on the financial health of the issuing firm, in reality the liability structure of corporate obligations is invariably much more intricate. The value of what one firm owes another is, however, not independent of the values of debt issued by other firms in the financial network. The value of most firms is dependent on the payoff from financial claims on other firms. The value of these claims depends in turn on the financial health of yet other firms in the system. Moreover the linkages between firms are reciprocal, a default by firm A on its obligations to firm B may lead B to default on its obligations to C. C's default may, in turn, have a feedback effect on A. These interconnections are particularly salient when firms are part of a single clearing mechanism in which the repayment obligations of all firms within the system are determined simultaneously in fashion consistent with the priority of debt claims and the limited liability of equity.

Item Type: Conference or Workshop Item (Paper)
Keywords: clearing systems, finance
Subject(s): Finance
Date Deposited: 01 Aug 2012 15:17
Last Modified: 01 Mar 2017 10:51
Funders: N/A

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