Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem
We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given pro...
| Main Authors: | , , |
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| פורמט: | Journal article |
| שפה: | English |
| יצא לאור: |
Springer
2023
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| _version_ | 1826313289644113920 |
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| author | Cuchiero, C Reisinger, C Rigger, S |
| author_facet | Cuchiero, C Reisinger, C Rigger, S |
| author_sort | Cuchiero, C |
| collection | OXFORD |
| description | We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent’s control problem converges as the number of defaultable institutions goes to infinity, and that it satisfies a drift controlled version of the supercooled Stefan problem. We compute optimal strategies in feedback form by solving numerically a regularized version of the corresponding mean field control problem using a policy gradient method. Our simulations show that the central agent’s optimal strategy is to subsidise banks whose equity values lie in a non-trivial time-dependent region. |
| first_indexed | 2024-03-07T08:00:39Z |
| format | Journal article |
| id | oxford-uuid:8857abe9-3ee3-4edc-a0d6-93c732eeac41 |
| institution | University of Oxford |
| language | English |
| last_indexed | 2024-09-25T04:10:43Z |
| publishDate | 2023 |
| publisher | Springer |
| record_format | dspace |
| spelling | oxford-uuid:8857abe9-3ee3-4edc-a0d6-93c732eeac412024-06-18T09:08:30ZOptimal bailout strategies resulting from the drift controlled supercooled Stefan problemJournal articlehttp://purl.org/coar/resource_type/c_dcae04bcuuid:8857abe9-3ee3-4edc-a0d6-93c732eeac41EnglishSymplectic ElementsSpringer2023Cuchiero, CReisinger, CRigger, SWe consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent’s control problem converges as the number of defaultable institutions goes to infinity, and that it satisfies a drift controlled version of the supercooled Stefan problem. We compute optimal strategies in feedback form by solving numerically a regularized version of the corresponding mean field control problem using a policy gradient method. Our simulations show that the central agent’s optimal strategy is to subsidise banks whose equity values lie in a non-trivial time-dependent region. |
| spellingShingle | Cuchiero, C Reisinger, C Rigger, S Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title | Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title_full | Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title_fullStr | Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title_full_unstemmed | Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title_short | Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem |
| title_sort | optimal bailout strategies resulting from the drift controlled supercooled stefan problem |
| work_keys_str_mv | AT cuchieroc optimalbailoutstrategiesresultingfromthedriftcontrolledsupercooledstefanproblem AT reisingerc optimalbailoutstrategiesresultingfromthedriftcontrolledsupercooledstefanproblem AT riggers optimalbailoutstrategiesresultingfromthedriftcontrolledsupercooledstefanproblem |