Quotation Feinstein, Zachary, Pang, Weijie, Rudloff, Birgit, Schaanning, Eric, Sturm, Stephan, Wildman, Mackenzie. 2018. Sensitivity of the Eisenberg-Noe clearing vector to individual interbank liabilities. SIAM Journal on Financial Mathematics. 9 (4), 1286-1325.


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Abstract

We quantify the sensitivity of the Eisenberg-Noe clearing vector to estimation errors in the bilateral liabilities of a financial system. The interbank liabilities matrix is a crucial input to the computation of the clearing vector. However, in practice central bankers and regulators must often estimate this matrix because complete information on bilateral liabilities is rarely available. As a result, the clearing vector may suffer from estimation errors in the liabilities matrix. We quantify the clearing vector's sensitivity to such estimation errors and show that its directional derivatives are, like the clearing vector itself, solutions of fixed point equations. We describe estimation errors utilizing a basis for the space of matrices representing permissible perturbations and derive analytical solutions to the maximal deviations of the Eisenberg--Noe clearing vector. This allows us to compute upper bounds for the worst case perturbations of the clearing vector. Moreover, we quantify the probability of observing clearing vector deviations of a certain magnitude, for uniformly or normally distributed errors in the relative liability matrix. Applying our methodology to a dataset of European banks, we find that perturbations to the relative liabilities can result in economically sizeable differences that could lead to an underestimation of the risk of contagion. Our results are a first step towards allowing regulators to quantify errors in their simulations.

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Publication's profile

Status of publication Published
Affiliation WU
Type of publication Journal article
Journal SIAM Journal on Financial Mathematics
Citation Index SSCI
WU-Journal-Rating new FIN-A
Language English
Title Sensitivity of the Eisenberg-Noe clearing vector to individual interbank liabilities
Volume 9
Number 4
Year 2018
Page from 1286
Page to 1325
Reviewed? Y
URL https://epubs.siam.org/doi/abs/10.1137/18M1171060
DOI https://doi.org/10.1137/18M1171060
Open Access N

Associations

People
Rudloff, Birgit (Details)
External
Feinstein, Zachary (Washington University in St. Louis, United States/USA)
Pang, Weijie (Worcester Polytechnic Institute, United States/USA)
Schaanning, Eric (Norges Bank Research, Norway)
Sturm, Stephan (Worcester Polytechnic Institute, United States/USA)
Wildman, Mackenzie (University of California Santa Barbara, United States/USA)
Organization
Institute for Statistics and Mathematics IN (Details)
Research areas (Ă–STAT Classification 'Statistik Austria')
1118 Probability theory (Details)
1137 Financial mathematics (Details)
5361 Financial management (Details)
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