SEM217: Zachary Feinstein, Stevens Institute of Technology: Endogenous Network Valuation Adjustment and the Systemic Term Structure in a Dynamic Interbank Model

Tuesday, February 21st @ 11:00-12:30 PM (RECORDING)

In this talk we introduce an interbank network with stochastic dynamics in order to study the yield curve of bank debt under an endogenous network valuation adjustment. This entails a forward-backward approach in which the future probability of default is required to determine the present value of debt. As a consequence, the systemic model presented herein provides the network valuation adjustment to the term structure for free without additional steps required. Time permitting, we present this problem in two parts: (i) a single maturity setting that closely matches the traditional interbank network literature and (ii) a multiple maturity setting to consider the full term structure. Numerical case studies are presented throughout to demonstrate the financial implications of this systemic risk model.