Strong Approximations and Irrationality in Financial Networks with Financial Derivatives

09/14/2021 ∙ by Stavros D. Ioannidis, et al. ∙ 0

Financial networks model a set of financial institutions (firms) interconnected by obligations. Recent work has introduced to this model a class of obligations called credit default swaps, a certain kind of financial derivatives. The main computational challenge for such systems is known as the clearing problem, which is to determine which firms are in default and to compute their exposure to systemic risk, technically known as their recovery rates. It is known that the recovery rates form the set of fixed points of a simple function, and that these fixed points can be irrational. Furthermore, Schuldenzucker et al. (2016) have shown that finding a weakly (or "almost") approximate (rational) fixed point is PPAD-complete. In light of the above, we further study the clearing problem from the point of view of irrationality and approximation strength. Firstly, as weakly approximate solutions are hard to justify for financial institutions, we study the complexity of finding a strongly (or "near") approximate solution, and show FIXP-completeness. Secondly, we study the structural properties required for irrationality, and we give necessary conditions for irrational solutions to emerge: The presence of certain types of cycles in a financial network forces the recovery rates to take the form of roots of second- or higher-degree polynomials. In the absence of a large subclass of such cycles, we study the complexity of finding an exact fixed point, which we show to be a problem close to, albeit outside of, PPAD.



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