Andreas' mathematical puzzle Goats, Wolves and Lions reminded me on a general discussion, motivated by the complexity economy thinkers: about analogy from food webs (what eats what) to economic webs (who profits from whom) - debt webs, for example, would provide better insight to avoid bank's (true) systemic risk?
Mark Buchanan suggests a transfer of Google's PageRank algorithm into a DebtRank scheme could help reducing instability of the finical system - How Google's algorithm could fix the financial system.
Motivated by this I have written about Analogies, Metaphors and Big Problems
Who are the Lions, Wolves and Goates in an economic web?
This is not so easy to say, in a DebtRank the bank size is not as important as we might have thought. It is more the effect of transition: how wide would the spread of economies distress be, if a bank failed.
BTW, two physicist of Austria presented this article about how DebRank could be used to design a systemic risk transaction tax. It would maybe change the DebtRank in a way that financial institutions would never need to pay the tax. Lions and wolves may transmute?
DebtRank Value Adjustment?
Another thing comes to my mind. DVA is to reflect the market value of non-performace to the carrying value of fixed income securities issued by a company.
This needs exposure modeling, the prediction of future cash flows of a portfolio with a counter party - that needs the estimation of default potability …
This introduces much more complexity in the valuation space.
What, if we took into account the DebtRank of counter parties? With possible feedback loops?
p.s. the DebtRank metaphor has nothing to do with the solution of the puzzle.
Picture from sehfelder
