Isaac Sonin, UNC Charlotte
Title: A Continuous-Time Model of Financial Clearing Part 2
Abstract: We present a simple model of clearing in financial networks in continuous time. In the model, banks (firms, agents) are represented as tanks (reservoirs) with liquid (money) flowing in and out. This approach provides a simple recursive solution to a classical static model of financial clearing introduced by Eisenberg and Noe (2001). It also suggests a practical mechanism of simultaneous and real time payments. The dynamic structure of our model helps answer other related questions and, potentially, opens the way to handle more complicated dynamic financial networks, e.g., liabilities with different maturities. Also, our approach provides a useful tool for solving nonlinear equations involving a linear system and max min operations similar to the Bellman equation for the optimal stopping of Markov chains and other optimization problems.