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on Monetary Economics |
| By: | Anita Mehta |
| Abstract: | We present a model of predatory traders interacting with each other in the presence of a central reserve (which dissipates their wealth through say, taxation), as well as inflation. This model is examined on a network for the purposes of correlating complexity of interactions with systemic risk. We suggest the use of selective networking to enhance the survival rates of arbitrarily chosen traders. Our conclusions show that networking with 'doomed' traders is the most risk-free scenario, and that if a trader is to network with peers, it is far better to do so with those who have less intrinsic wealth than himself to ensure individual, and perhaps systemic stability. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.1374&r=mon |
| By: | Henri Pag\`es; Dylan Possamai |
| Abstract: | In this paper, we take up the analysis of a principal/agent model with moral hazard introduced in \cite{pages}, with optimal contracting between competitive investors and an impatient bank monitoring a pool of long-term loans subject to Markovian contagion. We provide here a comprehensive mathematical formulation of the model and show using martingale arguments in the spirit of Sannikov \cite{san} how the maximization problem with implicit constraints faced by investors can be reduced to a classic stochastic control problem. The approach has the advantage of avoiding the more general techniques based on forward-backward stochastic differential equations described in \cite{cviz} and leads to a simple recursive system of Hamilton-Jacobi-Bellman equations. We provide a solution to our problem by a verification argument and give an explicit description of both the value function and the optimal contract. Finally, we study the limit case where the bank is no longer impatient. |
| Date: | 2012–02 |
| URL: | http://d.repec.org/n?u=RePEc:arx:papers:1202.2076&r=mon |