The Role of Entropy in Estimating Financial Network Default Impact

The Role of Entropy in Estimating Financial Network Default Impact

Agents in financial networks can simultaneously be both creditors and debtors, creating the possibility that a default may cause a subsequent default cascade. Resolution of unpayable debts in these situations will have a distributional impact. Using a relative entropy-based measure of the distributi...

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Bibliographic Details
Main Author: Michael Stutzer
Format: Article
Language:English
Published: MDPI AG 2018-05-01
Series:Entropy
Subjects:
minimum mutual information estimation
financial networks
default resolution
Online Access:http://www.mdpi.com/1099-4300/20/5/369
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spelling doaj-18e6622381ca4ab89549c395717fc1822020-11-24T22:42:41ZengMDPI AGEntropy1099-43002018-05-0120536910.3390/e20050369e20050369The Role of Entropy in Estimating Financial Network Default ImpactMichael Stutzer0Leeds School of Business, University of Colorado, Boulder, CO 80309, USAAgents in financial networks can simultaneously be both creditors and debtors, creating the possibility that a default may cause a subsequent default cascade. Resolution of unpayable debts in these situations will have a distributional impact. Using a relative entropy-based measure of the distributional impact of the subsequent default resolution process, it is argued that minimum mutual information estimation of unknown cells in the matrix of funds originally owed by the network participants to each other does not introduce systematic biases when estimating that impact.http://www.mdpi.com/1099-4300/20/5/369minimum mutual information estimationfinancial networksdefault resolution
collection DOAJ
language English
format Article
sources DOAJ
author Michael Stutzer
spellingShingle Michael Stutzer
The Role of Entropy in Estimating Financial Network Default Impact
Entropy
minimum mutual information estimation
financial networks
default resolution
author_facet Michael Stutzer
author_sort Michael Stutzer
title The Role of Entropy in Estimating Financial Network Default Impact
title_short The Role of Entropy in Estimating Financial Network Default Impact
title_full The Role of Entropy in Estimating Financial Network Default Impact
title_fullStr The Role of Entropy in Estimating Financial Network Default Impact
title_full_unstemmed The Role of Entropy in Estimating Financial Network Default Impact
title_sort role of entropy in estimating financial network default impact
publisher MDPI AG
series Entropy
issn 1099-4300
publishDate 2018-05-01
description Agents in financial networks can simultaneously be both creditors and debtors, creating the possibility that a default may cause a subsequent default cascade. Resolution of unpayable debts in these situations will have a distributional impact. Using a relative entropy-based measure of the distributional impact of the subsequent default resolution process, it is argued that minimum mutual information estimation of unknown cells in the matrix of funds originally owed by the network participants to each other does not introduce systematic biases when estimating that impact.
topic minimum mutual information estimation
financial networks
default resolution
url http://www.mdpi.com/1099-4300/20/5/369
work_keys_str_mv AT michaelstutzer theroleofentropyinestimatingfinancialnetworkdefaultimpact
AT michaelstutzer roleofentropyinestimatingfinancialnetworkdefaultimpact
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