• Corpus ID: 240419862

Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem

  title={Optimal bailout strategies resulting from the drift controlled supercooled Stefan problem},
  author={Christa Cuchiero and Christoph Reisinger and Stefan Rigger},
We consider the problem faced by a central bank which bails out distressed financial institutions that pose systemic risk to the banking sector. In a structural default model with mutual obligations, the central agent seeks to inject a minimum amount of cash in order to limit defaults to a given proportion of entities. We prove that the value of the central agent’s control problem converges as the number of defaultable institutions goes to infinity, and that it satisfies a drift controlled… 
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