Tom Fischer (Universität Würzburg) – Valuation in the structural model of financial networks

This presentation summarizes some previously published and several to date unpublished results for an asset and derivatives pricing model which accounts for systemic counterparty risk in a structural manner. The model allows for the cross-ownership of equities and liabilities within a network of financial entities. Assets and liabilities within the system, as well as the corresponding ownership structures, are allowed to depend on the prices of system-exogenous assets. Liabilities, which can also be derivatives of system-exogenous or system-endogenous assets, belong to one of potentially many seniority classes, whose order of priority is properly incorporated. The presented work generalizes some of the results by Eisenberg and Noe, Suzuki, Elsinger, and Gouriéroux et al., and can be understood as a far-reaching extension of the Merton model. Of particular concern are the existence and the uniqueness of price solutions, as well as the existence of greatest (i.e. globally Pareto-dominant) solutions when multiple equilibria exist. In the latter case, unambiguous risk-neutral pricing of all liabilities might still be possible. In line with previous results by Elsinger, the value of a system outsider's holdings is always uniquely determined, and – for the group of all system outsiders and bankruptcy costs absent - it never pays to bail out defaulting entities.