Isaac Sonin, UNC Charlotte
Title: A Continuous-Time Model of Financial Clearing. (Banks as Tanks).
Abstract: We present a simple and transparent model of clearing in financial networks in continuous time, in which firms are represented by reservoirs filled with “liquid money,” flowing in and out of each firm. The model gives a simple recursive solution to a classical static model of financial clearing by Eisenberg and Noe (2001). The dynamic structure of our model opens the way to handle more complicated real financial networks dynamic in nature. Our approach also provides a useful tool to solve nonlinear equations involving linear system and max min operations similar to Bellman equation for the optimal stopping of Markov chains and other optimization problems.