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Gabrielle Demange

is Directeur de recherches at l'Ecole des Hautes Etudes en Sciences Sociales (EHESS) and associate chair at Paris School of Economics. Her main interests are in social choice and game theories, (multi-item auctions, voting rules, coalitions and networks) and financial economics (intergenerational risk sharing, security design, impact of information on markets, intermediation). Her works on two-sided matching games and multi-item auctions with David Gale were among the first in a now large field. Her current research studies ranking methods with application to search engines on the Web and explores network models with a special interest to financial networks. Apart from research articles in top journals, she has written three text books in Finance and Game Theory. She is a Fellow of the Econometric Society and member of The Academia Europaea, the CEPR and Cesifo networks. She has served as a member of various editorial boards and Scientific Councils.

http://www.parisschoolofeconomics.eu/en/demange-gabrielle/

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Contagion in Financial Networks: a Threat Index

An intricate web of claims and obligations ties together the balance sheets of a wide variety of financial institutions. Under the occurrence of default, these interbank claims generate externalities across institutions and possibly disseminate defaults and bankruptcy. Building on a simple model for the joint determination of the repayments of interbank claims, this paper introduces a measure of the threat that a bank poses to the system. Such a measure, called threat index, may be helpful to determine how to inject cash into banks so as to increase debt reimbursement, or to assess the contributions of individual institutions to the risk in the system. Although the threat index and the default level of a bank both reflect some form of weakness and are affected by the whole liability network, the two indicators differ. As a result, injecting cash into the banks with the largest default level may not be optimal.

Last modified: 2018.11.30.