Paper: arXiv 2602.14378

Authors: Antonio Scala

Abstract

Financial structures such as securitisations, insurance contracts, and other hierarchical claims systems can be interpreted as deterministic allocation mechanisms acting on stochastic inflow processes. This paper develops a general computational representation of such structures by separating the stochastic generation of inflows from the deterministic rules governing their distribution across positions. Allocation rules, trigger conditions, and priority relations are expressed as explicit, state-dependent operators mapping realised inflows to payments under each scenario. This representation enables financial structures to be analysed as computable economic systems whose performance and risk characteristics can be evaluated consistently across alternative configurations within a unified stochastic environment. While motivated by applications in structured finance, the framework applies more broadly to contractual and institutional arrangements in which uncertain resources are allocated across ordered claims. By providing a unified computational architecture for representing and comparing such mechanisms, the approach supports systematic analysis of structural design, risk distribution, and contractual transparency under uncertainty.

Complexity vs Empirical Score

  • Math Complexity: 5.5/10
  • Empirical Rigor: 2.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper presents a formal, mathematical abstraction of cash-flow waterfall mechanisms and priority rules into state-dependent computational operators. While conceptually clear and novel in its formalization of structured finance, it relies purely on theoretical derivations and toy examples without empirical backtesting or real-world transaction datasets.

Research Flowchart

  flowchart TD
    A["Research Goal: Computational Framework for Financial Structures"] --> B["Inputs: Stochastic Inflow Processes & Contractual Rules"]
    B --> C["Separation Architecture: Inflows vs. Deterministic Allocation"]
    C --> D["State-Dependent Operators: Map Realised Inflows to Payments"]
    D --> E["Unified Stochastic Simulation & Evaluation"]
    E --> F["Outcomes: Systematic Analysis of Risk, Structural Design & Transparency"]