K Mayo and MP Wellman

20th International Conference on Autonomous Agents and Multiagent Systems (AAMAS), Extended Abstract, May 2021 (forthcoming).


Portfolio compression, the netting of cycles in a financial network, is employed in over-the-counter derivative markets as a method for simplifying balance sheets. Whereas canceling debts can sometimes promote financial stability, previous work has demonstrated that in some cases compression can actually contribute to systemic risk. We analyze portfolio compression as a strategic decision made by firms within a debt network. We define a network game in which firms have only local information and ask what criteria the firms should consider in their decision to compress. We propose a variety of heuristic strategies and evaluate them using agent-based simulation and empirical game-theoretic analysis. Our results show that some simple strategies based on local information perform better than the unconditional strategies of always agreeing or disagreeing to compression proposals. We then analyze the effects of using equilibrium strategies for the compression decision in terms of social welfare. Our analysis shows that while the strategic decision does not result in the socially optimal outcome, the price of anarchy is high.