Robust Risk Quantification via Shock Propagation in Financial Networks

Abstract

Robust Risk Quantification via Shock Propagation in Financial Networks Despite the significance of risk contagion in financial networks, uncertainties arise in interbank network structures because of limited information. To address this, proposed is a robust optimization approach to estimate worst-case default probabilities and capital requirements for a specific group of banks (e.g., systemically important financial institutions). By applying this tool, we analyze the impact of different incomplete network information structures and gain regulatory insights into gathering actionable network information.