eprintid: 14089 rev_number: 9 eprint_status: archive userid: 353 dir: disk0/00/01/40/89 datestamp: 2016-12-07 08:40:30 lastmod: 2021-08-27 17:28:13 status_changed: 2016-12-07 08:40:30 type: article metadata_visibility: show item_issues_count: 3 creators_name: Leduc, M.V. creators_name: Poledna, S. creators_name: Thurner, S. creators_id: 8754 creators_id: 2083 creators_id: 1918 title: Systemic Risk Management in Financial Networks with Credit Default Swaps ispublished: pub divisions: prog_asa keywords: Systemic Risk, Credit Default Swaps, DebtRank, Agent-Based Models, Multiplex Networks, Interbank Systems abstract: We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a CDS market can be designed to rewire the network of interbank exposures in a way that makes it more resilient to insolvency cascades. A regulator can use information about the topology of the interbank network to devise a systemic insurance surcharge that is added to the CDS spread. CDS contracts are thus effectively penalized according to how much they contribute to increasing systemic risk. CDS contracts that decrease systemic risk remain untaxed. We simulate this regulated CDS market using an agent-based model (CRISIS macro-financial model) and we demonstrate that it leads to an interbank system that is more resilient to insolvency cascades. date: 2016-01-09 date_type: published id_number: doi:10.2139/ssrn.2713200 creators_browse_id: 176 creators_browse_id: 235 creators_browse_id: 307 full_text_status: public publication: SSRN Electronic Journal pagerange: 1-20 refereed: TRUE issn: 1556-5068 coversheets_dirty: FALSE fp7_project: no fp7_type: info:eu-repo/semantics/article citation: Leduc, M.V. , Poledna, S. , & Thurner, S. (2016). Systemic Risk Management in Financial Networks with Credit Default Swaps. SSRN Electronic Journal 1-20. 10.2139/ssrn.2713200 . document_url: https://pure.iiasa.ac.at/id/eprint/14089/1/Systemic%20Risk%20Management%20in%20Financial%20Networks%20with%20Credit%20Default%20Swaps%20.pdf