Modeling Investment Behavior and Risk Propagation in Financial Networks using Inverse Optimization


Department of Systems Engineering and Engineering Management
The Chinese University of Hong Kong


Date: 4:30pm-5:30pm, December 14 (Wednesday), 2016

Title: Modeling Investment Behavior and Risk Propagation in Financial
Networks using Inverse Optimization

Speaker: Prof. John R. Birge, The University of Chicago

Connections among institutions in the global network create the
potential for risk to propagate and for failures to cascade as
successive institutions fail. As conditions, such as capital
requirements change, institutions may modify their behavior in ways that
can fundamentally change the relationships among institutions and lead
to substantially different failure dynamics. Increasing capital
requirements can, for example, paradoxically increase the potential for
failures to propagate by altering the intensity of relationships and
risk exposures. Predicting such outcomes and directing policies to
reduce overall systemic risk requires modeling of institutional
responses to environmental conditions. This paper discusses an approach
based on inverse optimization of relationship decisions subject to
capital constraints. A model of cascading failures and data from
national debt cross-holdings illustrate the approach and demonstrate how
changing capital requirements may lead to distinct differences in the
sequences and extent of failures. Relationships to supply chains will
also be discussed.

John R. Birge is the Jerry W. and Carol Lee Levin Professor of Operations Management at
the University of Chicago Booth School of Business. Previously, he was Dean of the McCormick
School of Engineering and Applied Science and Professor of Industrial Engineering and Management
Sciences at Northwestern University. He also served as Professor and Chair of Industrial and
Operations Engineering at the University of Michigan, where he also established the Financial Engineering
Program. He is former Editor-in-Chief of Mathematical Programming, Series B and former President of INFORMS.
His honors and awards include the IIE Medallion Award, the INFORMS Fellows Award, the MSOM Society Distinguished
Fellow Award, the Harold W. Kuhn Prize, the George E. Kimball Medal, the William Pierskalla Award, and
election to the US National Academy of Engineering. He received M.S. and Ph.D. degrees from Stanford University
in Operations Research, and an A.B. in Mathematics from Princeton University.
Everyone is welcome to attend the talk!

Venue: Room 1009,
William M.W. Mong Engineering Building (ERB),
(Engineering Building Complex Phase 2)
The Chinese University of Hong Kong.

The talk will be hosted by:
Prof. Chen Nan,
Department of Systems Engineering and Engineering Management,
The Chinese University of Hong Kong,

SEEM-5201 Website:


Wednesday, December 14, 2016 - 08:30 to 09:30