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The Effect of Heterogeneous Participants on the Payment and Settlement System: Systemic Risk and Investment Return∗ (2007)
BibTeX
@MISC{Song07theeffect,
author = {Sooyoung Song},
title = {The Effect of Heterogeneous Participants on the Payment and Settlement System: Systemic Risk and Investment Return∗},
year = {2007}
}
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Abstract
Among the default risks, systemic risk is of the biggest concern over the safety and effi-ciency of the payment and settlement system. When homogeneous financial institutions are linked with each other through the credit chain, a gridlock takes place as equilibrium in the payment and settlement system. A heterogeneous participant in the system could, however, have incentive to fulfill the obligation when otherwise homogenous participants strategically default. That is, fulfillment of obligation turns out to be a Nash equilibrium strategy for the heterogeneous participant whose level of investment return differs from those of remaining participants. The larger the benefit is, the stronger incentive a finan-cial institution has to keep the system working properly. The current paper sheds new light on the effect of heterogeneous financial institutions on the robustness of payment and settlement system under the general equilibrium setup.
Keyphrases
settlement system heterogeneous participant systemic risk investment return finan-cial institution investment return differs new light current paper general equilibrium setup nash equilibrium strategy credit chain default risk heterogeneous financial institution homogeneous financial institution homogenous participant
