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The Role of Entropy in Estimating Financial Network Default Impact

Leeds School of Business, University of Colorado, Boulder, CO 80309, USA
Entropy 2018, 20(5), 369; https://doi.org/10.3390/e20050369
Received: 25 April 2018 / Revised: 10 May 2018 / Accepted: 15 May 2018 / Published: 16 May 2018
(This article belongs to the Section Information Theory, Probability and Statistics)
Agents in financial networks can simultaneously be both creditors and debtors, creating the possibility that a default may cause a subsequent default cascade. Resolution of unpayable debts in these situations will have a distributional impact. Using a relative entropy-based measure of the distributional impact of the subsequent default resolution process, it is argued that minimum mutual information estimation of unknown cells in the matrix of funds originally owed by the network participants to each other does not introduce systematic biases when estimating that impact. View Full-Text
Keywords: minimum mutual information estimation; financial networks; default resolution minimum mutual information estimation; financial networks; default resolution
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Stutzer, M. The Role of Entropy in Estimating Financial Network Default Impact. Entropy 2018, 20, 369.

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