We introduce a network valuation model (hereafter NEVA) for the ex-ante valuation of claims among financial institutions connected in a network of liabilities. Similar to previous work, the new framework allows to endogenously determine the recovery rate on all claims upon the default of some institutions. In addition, it also allows to account for ex-ante uncertainty on the asset values, in particular the one arising when the valuation is carried out at some time before the maturity of the claims. The framework encompasses as special cases both the ex-post approaches of Eisenberg and Noe and its previous extensions, as well as the ex-ante approaches, in the sense that each of these models can be recovered exactly for special values of the parameters . We characterize the existence and uniqueness of the solutions of the valuation problem under general conditions on how the value of each claim depends on the equity of the counterparty . Further, we define an algorithm to carry out the network valuation and we provide sufficient conditions for convergence to the maximal solution .
We introduce a general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the presence of uncertainty on banks' external assets. At the same time, it also provides a natural extension of classic structural credit risk models to the case of an interconnected system . We characterize the existence and uniqueness of a valuation that maximises individual and total equity values for all banks. We apply our model to the assessment of systemic risk, and in particular for the case of stress-testing . Further, we provide a fixed-point algorithm to carry out the network valuation and the conditions for its convergence .
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network valuation model (hereafter NEVA) for the ex-ante valuation of claims among financial institutions connected in a network of liabilities. Similar to previous work, the new framework allows to endogenously determine the recovery rate on all claims upon the default of some institutions. In addition, it also allows to account for ex-ante uncertainty on the asset values, in particular the one arising when the valuation is carried out at some time before the maturity of the claims. The framework encompasses as special cases both the ex-post approaches of Eisenberg and Noe and its previous extensions, as well as the ex-ante approaches, in the sense that each of these models can be recovered exactly for special values of the parameters
general model for the balance-sheet consistent valuation of interbank claims within an interconnected financial system. Our model represents an extension of clearing models of interdependent liabilities to account for the presence of uncertainty on banks' external assets. At the same time, it also provides a natural extension of classic structural credit risk models to the case of an interconnected system
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the solutions of the valuation problem under general conditions on how the value of each claim depends on the equity of the counterparty
a valuation that maximises individual and total equity values for all banks. We apply our model to the assessment of systemic risk, and in particular for the case of stress-testing
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define an
provide a fixed-point
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we provide sufficient conditions for convergence to the maximal solution
the conditions for its convergence