Dynamics of international financial networks with risk management

Abstract

In this paper, we develop an international financialnetwork model in which the sources of funds and the intermediaries are multicriteria decision-makers and are concerned with both net revenue maximization and risk minimization. The model allows for both physical as well as electronic transactions and considers three tiers of decision-makers who may be located in distinct countries and may conduct their transactions in different currencies. We describe the behaviour of the various decision-makers, along with their optimality conditions, and derive the variational inequality formulation of the governing equilibrium conditions. We then propose a dynamic adjustment process which yields the evolution of the financial flows and prices and demonstrate that it can be formulated as a projected dynamical system. We also provide qualitative properties including stability analysis results. Finally, we discuss a discrete-time algorithm which can be applied to track the dynamic trajectories and yields the equilibrium financial flows and prices. We illustrate both the modelling framework as well as the computational procedure with several numerical international financial network examples.