Dynamic Clearing and Contagion in Financial Networks

Understand

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.

• This framework separates the cash account and long-term capital account to more accurately model the health of a financial institution.
• In doing so, such a system allows us to distinguish between delinquency and default as well as between defaults resulting from either insolvency or illiquidity.