Research on optimal loss allocation under systemic risk released
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Yucheng Guo and Qinxin Yan released a research paper on the optimal solution for systemic risk loss allocation, focusing on the problem of bank default loss allocation without external capital injection. The study sets that all losses caused by bank defaults must be borne by surviving banks, with no external capital injection; it proves that for all non-decreasing concave terminal returns, the truncation rule of "taxing the wealthiest" is the optimal solution. The study constructs a continuous-time optimal solution through time discretization, characterizes the optimal flow as a new type of reflected free boundary problem, and proves the positive time smoothness of the free boundary and the density of surviving banks.
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- arXiv q-finOptimal Loss Allocation and Reflected Free Boundaries in Systemic Risk
This study focuses on the allocation of bank default losses without external capital injection, proving that for all non-decreasing concave terminal payoffs, the "tax the richest" truncation rule is optimal. The study constructs a continuous-time optimal solution through time discretization, characterizes the optimal flow as a novel reflected free boundary problem, and proves the positive time smoothness of the free boundary and the density of surviving banks.
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