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Type Conference or Workshop Paper
Scope Discipline-based scholarship
Published in Proceedings Yes
Title Finding Clearing Payments in Financial Networks with Credit Default Swaps is PPAD-complete
Organization Unit
Authors
  • Steffen Schuldenzucker
  • Sven Seuken
  • Stefano Battiston
Presentation Type paper
Item Subtype Original Work
Refereed No
Status Published in final form
Language
  • English
ISBN 978-3-95977-029-3
ISSN 1868-8969
Event Title The 8th Innovations in Theoretical Computer Science (ITCS) Conference
Event Type conference
Event Location Berkeley
Event Start Date January 9 - 2017
Event End Date January 11 - 2017
Series Name LIPIcs : Leibniz International Proceedings in Informatics
Number 67
Place of Publication New York, NY, USA
Publisher Schloss Dagstuhl -- Leibniz-Zentrum fuer Informatik
Abstract Text We consider the problem of clearing a system of interconnected banks that have been exposed to a shock on their assets. Eisenberg and Noe (2001) showed that when banks can only enter into simple debt contracts with each other, then a clearing vector of payments can be computed in polynomial time. In this paper, we show that the situation changes radically when banks can also enter into credit default swaps (CDSs), i.e., financial derivative contracts that depend on the default of another bank. We prove that computing an approximate solution to the clearing problem with sufficiently small constant error is PPAD-complete. To do this, we demonstrate how financial networks with debt and CDSs can encode arithmetic operations such as addition and multiplication. Our results have practical impact for network stress tests and reveal computational complexity as a new concern regarding the stability of the financial system.
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Digital Object Identifier 10.4230/LIPIcs.ITCS.2017.32
Other Identification Number merlin-id:14567
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