Before the 2008 financial crisis, most research in financial mathematics focused on the risk management and the pricing of options without considering effects of counterparties’ default, illiquidity problems, systemic risk and the role of the repurchase agreement (Repo). During the 2008 financial crisis, a frozen Repo market led to a shutdown of short sales in the stock market. Cyclical interdependencies among financial corporations caused that a default of one firm seriously affected other firms and even the whole financial network. In this dissertation, we will consider financial markets which are shaped by financial crisis. This will be done from two distinct perspectives, an investor’s and a regulator’s. From an investor’s perspective, recently models were proposed to compute the total valuation adjustment (XVA) of derivatives without considering a potential crisis in the market. In our research, we include a possible crisis by apply an alternating renewal process to describe a switching between a normal financial status and a financial crisis status. We develop a framework for pricing the XVA of a European claim in this state-dependent framework. We represent the price as a solution to a backward stochastic differential equation and prove the existence and uniqueness of the solution. To study financial networks from a regulator’s perspective, one popular method is the fixed point based approach by L. Eisenberg and T. Noe. However, in practice, there is no accurate record of the interbank liabilities and thus one has to estimate them to use Eisenberg - Noe type models. In our research, we conduct a sensitivity analysis of the Eisenberg - Noe framework, and quantify the effect of the estimation errors to the clearing payments. We show that the effect of the missing specification of interbank connection to clearing payments can be described via directional derivatives that can be represented as solutions of fixed point equations. We also compute the probability of observing clearing payment deviations of a certain magnitude.

<p>The aim of this thesis is to study the role of banking in society and the effect of the</p> <p>interbank market on the performance of the banking system.</p> <p>It starts by reviewing</p> <p>several studies conducted on empirical banking networks and highlighting their salient</p> <p>features in the context of modern network theory. A simulated network resembling the</p> <p>characteristics documented in the empirical studies is then built and its resilience is</p> <p>analyzed with a particular emphasis in documenting the crucial role played by highly</p> <p>interconnected banks.</p> <p>It is our belief that the study of systemic risk and contagion in a banking system</p> <p>is an integral part to the study of the economic role of banks themselves. Thus the</p> <p>current work focuses on the fundamentals of banking and aims at identifying the</p> <p>necessary drivers for a dynamical setup of the interbank market.</p> <p>Through an agent–based model, we address the issues of bank formation, bank runs</p> <p>and the emergence of an interbank market. Starting with heterogeneous individuals,</p> <p>bank formation is viewed as an emergent phenomenon arising to meet the needs for</p> <p>investment opportunities in face of uncertain liquidity preferences. When banks work</p> <p>in isolation (no interbank market), in the long run and through a long experience with</p> <p>bank failures, banking turns into a monopoly or a market with few players.</p> <p>By equipping banks with their own learning tools and allowing an interbank market</p> <p>to develop, fewer bank failures and a less concentrated banking system are witnessed.</p> <p>In addition, through a scenario analysis, it is demonstrated that allowing banks to</p> <p>interact does not weaken the banking system in almost all the cases, and improves</p> <p>the performance on multiple occasions.</p> <p>The work is concluded by studying the effects of a banking system on individuals</p> <p>and the economy in what is called social measures. We establish that the effects</p> <p>of banking on social measures such as consumption level, consumption inequality</p> <p>between individuals, long term investment and economic waste, varies significantly</p> <p>based on the structure of the society.</p> / Doctor of Philosophy (PhD)