Title

Financial Networks with Electronic Transactions: Risk Management with Variable Weights

Document Type

Article

Department or Administrative Unit

Finance and Supply Chain Management

Publication Date

2011

Abstract

Advances in telecommunication networks, and, in particular, the Internet, have transformed the economic landscape for financial decision-making. In this paper, we develop a framework for the modeling, analysis, and computation of solutions to multitiered financial network problems with electronic transactions in which both the sources of financial funds as well as the intermediaries are multicriteria decision-makers. In particular, we assume that these decision-makers seek not only to maximize their net revenues but also to minimize risk with the risk being penalized by a variable weight. We make explicit the behavior of the various decision-makers, including the consumers at the demand markets for the financial products. We derive the optimality conditions, and demonstrate that the governing equilibrium conditions of the financial network economy can be formulated as a finite-dimensional variational inequality problem. Qualitative properties of the equilibrium financial flow and price pattern are provided. A computational procedure that exploits the network structure of the problem is proposed.

Comments

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Journal

Review of Business Research