TY - JOUR
T1 - Optimal network compression
AU - Amini, Hamed
AU - Feinstein, Zachary
N1 - Publisher Copyright:
© 2022 Elsevier B.V.
PY - 2023/5/1
Y1 - 2023/5/1
N2 - 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.
AB - 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.
KW - Finance
KW - Financial networks
KW - Portfolio compression
KW - Systematic shocks
KW - Systemic risk
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U2 - 10.1016/j.ejor.2022.07.026
DO - 10.1016/j.ejor.2022.07.026
M3 - Article
AN - SCOPUS:85135502531
SN - 0377-2217
VL - 306
SP - 1439
EP - 1455
JO - European Journal of Operational Research
JF - European Journal of Operational Research
IS - 3
ER -