Optimal Capital Requirements in Financial Networks with Fire Sales

I explore and analyze a problem of finding the socially optimal capital requirements for financial institutions considering two distinct channels of contagion: direct exposures among the institutions, as represented by a network and fire sales externalities, which reflect the negative price impact of massive liquidation of assets.These two channels amplify shocks from individual financial institutions to the financial system as a whole and thus increase the risk of joint defaults amongst the interconnected financial institutions; this is often referred to as systemic risk. In the model, there is a trade-off between reducing systemic risk and raising the capital requirements of the financial institutions. The policymaker considers this trade-off and determines the optimal capital requirements for individual financial institutions. I provide a method for finding and analyzing the optimal capital requirements that can be applied to arbitrary network structures and arbitrary distributions of investment returns.

In particular, I first consider a network model consisting only of direct exposures and show that the optimal capital requirements can be found by solving a stochastic linear programming problem. I then extend the analysis to financial networks with default costs and show the optimal capital requirements can be found by solving a stochastic mixed integer programming problem. The computational complexity of this problem poses a challenge, and I develop an iterative algorithm that can be efficiently executed. I show that the iterative algorithm leads to solutions that are nearly optimal by comparing it with lower bounds based on a dual approach. I also show that the iterative algorithm converges to the optimal solution.

Finally, I incorporate fire sales externalities into the model. In particular, I am able to extend the analysis of systemic risk and the optimal capital requirements with a single illiquid asset to a model with multiple illiquid assets. The model with multiple illiquid assets incorporates liquidation rules used by the banks. I provide an optimization formulation whose solution provides the equilibrium payments for a given liquidation rule.

I further show that the socially optimal capital problem using the ``socially optimal liquidation" and prioritized liquidation rules can be formulated as a convex and convex mixed integer problem, respectively. Finally, I illustrate the results of the methodology on numerical examples and

discuss some implications for capital regulation policy and stress testing.

The origin of incipient ferroelectricity in lead telluride.

The interactions between electrons and lattice vibrations are fundamental to materials behaviour. In the case of group IV-VI, V and related materials, these interactions are strong, and the materials exist near electronic and structural phase transitions. The prototypical example is PbTe whose incipient ferroelectric behaviour has been recently associated with large phonon anharmonicity and thermoelectricity. Here we show that it is primarily electron-phonon coupling involving electron states near the band edges that leads to the ferroelectric instability in PbTe. Using a combination of nonequilibrium lattice dynamics measurements and first principles calculations, we find that photoexcitation reduces the Peierls-like electronic instability and reinforces the paraelectric state. This weakens the long-range forces along the cubic direction tied to resonant bonding and low lattice thermal conductivity. Our results demonstrate how free-electron-laser-based ultrafast X-ray scattering can be utilized to shed light on the microscopic mechanisms that determine materials properties.