CSH Talk by Anton Pichler: “Minimizing Systemic Risk as an Optimal Network Reorganization Problem”

Jun 16, 2017 | 14:0015:00

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Anton Pichler’s talk “Minimizing Systemic Risk as an Optimal Network Reorganization Problem – The Case of Overlapping Portfolio Networks in the European Government Bond Market” takes place on June 16 at 2:15 pm in Seminar Room 101.


Systemic risk arises as a multi-layer network phenomenon, where layers represent direct financial exposures of various types, including interbank liabilities, derivative or foreign exchange exposures. Another network layer of systemic risk emerges through common asset holdings of financial institutions. Strongly overlapping portfolios lead to similar exposures caused by price movements of financial assets. We use a simple method to quantify systemic risk of overlapping portfolio networks from endogenous asset sales within the network. We then present a general optimization procedure where we minimize the systemic risk in a given financial market by optimally re-ordering overlapping portfolio networks, under the constraint that the expected returns and risks of the individual portfolios is unchanged. We explicitly demonstrate the method on the overlapping portfolio network of sovereign exposure between major European banks by using data from the European Banking Authority stress test 2016. We show that multiple systemic-risk-efficient allocations do exist, which are actually accessible by the optimization and that do not alter the returns and risks of the institutions’ portfolios. In the case of sovereign exposure, systemic risk can be reduced by more than 56%, without any detrimental effects. We confirm these results by a simple simulation of fire-sales in the government bond market.


Jun 16, 2017


Complexity Science Hub Vienna
+43 1 59991 600
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CSH Vienna
Josefstaedter Straße 39
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+43 1 59991 600
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