In this paper we will consider a generalized extension of the Eisenberg-Noe model of financial contagion to allow for time dynamics of the interbank liabilities . Emphasis will be placed on the construction, existence, and uniqueness of the continuous-time framework and its formulation as a differential equation driven by the operating cash flows. Finally, the financial implications of time dynamics will be considered. The focus will be on how the dynamic clearing solutions differ from those of the static Eisenberg-Noe model .
In this paper we introduce a generalized extension of the Eisenberg-Noe model of financial contagion to allow for time dynamics of the interbank liabilities , including a dynamic examination of default risk. Such a system allows us to distinguish between defaults resulting from either insolvency or illiquidity, and to analyze the resulting effects on the rest of the network. As a special case, we are also able to recover the solution to the Eisenberg-Noe system under certain model choices within the dynamic framework .
R
will consider
introduce
R
. Emphasis will be placed on the construction, existence, and uniqueness of the continuous-time framework and its formulation as a differential equation driven by the operating cash flows. Finally,
, including a dynamic examination of default risk. Such a system allows us to distinguish between defaults resulting from either insolvency or illiquidity, and to analyze the resulting effects on
R
financial implications of time dynamics will be considered. The focus will be on how the dynamic clearing solutions differ from those of the static
rest of the network. As a special case, we are also able to recover the solution to the
R
model
system under certain model choices within the dynamic framework