Management Science Publication: Default Ambiguity: Credit Default Swaps Create New Systemic Risks in Financial Networks
July 6, 2019: In a network of simple financial contracts, the problem of “who pays what to whom” is not trivial but solvable, following well-established approaches. However, as we reveal in this new paper, just published in Management Science, the introduction of derivative contracts in the network may make it impossible to determine even which institutions should be considered in default during a crisis. How can we manage this new source of systemic risk? Read more.
Nature Climate Change Publication: A climate stress-test of the financial system
March 27, 2017: Climate change brings new risks for financial investments, in particular for pension funds. An international team coordinated by the Dept. of Banking and Finance of the Univ. of Zurich develops a “climate stress-test” for financial institutions. Results suggest that while better disclosure of climate-relevant financial information can improve risk estimation, the early introduction of stable climate policies is needed to mitigate risk. Read more.
PNAS Publication: The Price of Complexity in Financial Networks
August 23, 2016. Abstract: Financial institutions form multilayer networks by engaging in contracts with each other and by holding exposures to common assets. As a result, the default probability of one institution depends on the default probability of all of the other institutions in the network. Here, we show how small errors on the knowledge of the network of contracts can lead to large errors in the probability of systemic defaults. From the point of view of financial regulators, our findings show that the complexity of financial networks may decrease the ability to mitigate systemic risk, and thus it may increase the social cost of financial crises. Read more
July 2016. We are pleased to announce the official launch of the FINEXUS Center for Financial Networks and Sustainability. Read more