Optimal network compression

Hamed Amini, Zachary Feinstein

Research output: Contribution to journalArticlepeer-review

10 Scopus citations

Abstract

This paper introduces a formulation of the optimal network compression problem for financial systems. This general formulation is presented for different levels of network compression or rerouting allowed from the initial interbank network. We prove that this problem is, generically, NP-hard. We focus on objective functions generated by systemic risk measures under shocks to the financial network. We use this framework to study the (sub)optimality of the maximally compressed network. We conclude by studying the optimal compression problem for specific networks; this permits us to study, e.g., the so-called robust fragility of certain network topologies more generally as well as the potential benefits and costs of network compression. In particular, under systematic shocks and heterogeneous financial networks the robust fragility results of Acemoglu, Ozdaglar, and Tahbaz-Salehi (2015) no longer hold generally.

Original languageEnglish
Pages (from-to)1439-1455
Number of pages17
JournalEuropean Journal of Operational Research
Volume306
Issue number3
DOIs
StatePublished - 1 May 2023

Keywords

  • Finance
  • Financial networks
  • Portfolio compression
  • Systematic shocks
  • Systemic risk

Fingerprint

Dive into the research topics of 'Optimal network compression'. Together they form a unique fingerprint.

Cite this