A Strategic Analysis of Portfolio Compression

We analyze portfolio compression, the netting of cycles in a financial network, 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 a compression and that when the decision is made strategically, the price of anarchy is always high.