Limiting characteristic function of the total solvency shock

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Let S1(0)=∑w≠1Sw1(0)S^{(0)}_{1}=\sum_{w\ne 1}S^{(0)}_{w1} be the total solvency shock transmitted to bank 11 in step 00, conditioned on the type T1=TT_1=T. Let f^Δ(0)(k′∣T′)\hat f^{(0)}_\Delta(k'\mid T'), P(T′)\mathbb{P}(T'), and κ(T′,T)\kappa(T',T) denote the quantities associated with the type-conditioned individual shocks and the inhomogeneous random financial network, and define

R(k,k′∣T,T′):=12π∫−∞0eik′yR(k,−y/λ) dy,R(k,k'\mid T,T'):=\frac{1}{2\pi}\int_{-\infty}^{0}e^{ik'y}R(k,-y/\lambda)\,\mathrm{d}y,

where R(k,a)R(k,a) is given by the source's formula with N=∞N=\infty and conditions T,T′T,T'. Total-solvency-shock characteristic-function conjecture. The characteristic function has the limiting behaviour

E(N)[eikS1(0)∣T]=f^S(0)(k∣T)(1+O(N−1)),\mathbb{E}^{(N)}[e^{ikS^{(0)}_{1}}\mid T]=\hat f^{(0)}_{S}(k\mid T)(1+O(N^{-1})),

with

f^S(0)(k∣T):=exp⁡(∑T′P(T′)κ(T′,T)∫−∞∞f^Δ(0)(k′∣T′)R(k,k′∣T,T′) dk′),\hat f^{(0)}_{S}(k\mid T):=\exp\left(\sum_{T'}\mathbb{P}(T')\kappa(T',T)\int_{-\infty}^{\infty}\hat f^{(0)}_\Delta(k'\mid T')R(k,k'\mid T,T')\,\mathrm{d}k'\right),

where the limit of the logarithm is in L2[0,∞)L^2[0,\infty). This conjecture results from an unproved asymptotic-independence step for the full collection of shocks, beyond the finite-collection result established in the surrounding discussion; rigorous proof remains open.

References

Primary source

T. R. Hurd, “Systemic Cascades On Inhomogeneous Random Financial Networks”, arXiv:1909.09239 (2019).

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