Journal article
Insurance risk analysis of financial networks vulnerable to a shock
European journal of operational research, Vol.301(2), pp.756-771
09/01/2022
DOI: 10.1016/j.ejor.2021.11.017
Abstract
•Construct a network composed of financial firms, primitive assets, and an insurer.•Analyze the insurance risk of selling protection to a network of financial firms.•Both the firms and insurer follow the mean-variance framework.•The network integration and shock play an intertwined role in the insurance risk.•Apply matrix techniques based on Farkas’ lemma to facilitate the analysis.
We conduct a risk analysis of non-core insurance business of selling protection to financial firms against investment losses due to a shock. A static structural model is constructed, composed of a network of firms who cross-hold each other, a financial market consisting of multiple primitive assets that are vulnerable to a shock, and an insurer who resides external to the network and assesses the opportunity to sell protection to the financial firms. Assume that each firm in the network is rational and able to decide how much protection to purchase to optimize its portfolio according to the mean-variance principle. As a result, the shock may impact on the insurer but indirectly through the network. In view of the robust-yet-fragile nature of financial networks that has been discovered, both empirically and theoretically, by various recent works, one expects that the network integration and the shock play an intertwined role in the insurance risk. Our study forms a theoretical confirmation of this surmise: Depending on the shock size, there are three mutually exclusive scenarios in which an increase in the network integration can either reduce or amplify the impact of the shock on the insurance risk.
Details
- Title: Subtitle
- Insurance risk analysis of financial networks vulnerable to a shock
- Creators
- Qihe Tang - UNSW SydneyZhiwei Tong - UNSW SydneyLi Xun - Changchun University
- Resource Type
- Journal article
- Publication Details
- European journal of operational research, Vol.301(2), pp.756-771
- DOI
- 10.1016/j.ejor.2021.11.017
- ISSN
- 0377-2217
- eISSN
- 1872-6860
- Publisher
- Elsevier B.V
- Grant note
- DOI: 10.13039/501100001809, name: National Natural Science Foundation of China, award: 11701043; DOI: 10.13039/100015539, name: Australian Government; DOI: 10.13039/501100000923, name: Australian Research Council, award: DP200101859; DOI: 10.13039/501100001773, name: University of New South Wales
- Language
- English
- Date published
- 09/01/2022
- Academic Unit
- Statistics and Actuarial Science
- Record Identifier
- 9984257625902771
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