Abstract

Controlling the Stability of Interconnected Financial Network

 

        Stabilizing an interconnected network has been the center of considerable research efforts, and electric power grids have traditionally been the focus of such efforts. In the wake of the financial crisis in 2008, however, the complex and interconnected financial network has captivated and motivated many researches. Our project attempts to analyze the possibility of an increase in stability of an interconnected financial network through various control strategies.

        We have use the Eisenberg-Noe model with adjustments to account for the fire sale capability of the firms. It was constructed with real balance sheet data of 38 globally important financial institutions. We have propose three control mechanisms and introduced several measures of stability that were used to gauge the effectiveness of the proposed control strategies. The project shows the effects of the mechanisms on the planned measures of stability and concludes with a pros and cons assessment for each of the solutions.