Endogenous Risk in Nigerian Financial Networks: An Operations Research Perspective on Systemic Stability

Systemic risk in Nigeria's financial network, encompassing commercial banks, insurance companies, pension funds, and capital market participants, arises not only from exogenous shocks but from endogenous feedback dynamics in which the portfolio and lending decisions of individual institutions amplify system-wide vulnerabilities. This dissertation develops an operations research perspective on endogenous risk and systemic stability in Nigerian financial networks, making original theoretical contributions to network optimization, stochastic control, and financial system modelling. A formal network model of Nigeria's financial system is constructed using balance sheet and bilateral exposure data from Central Bank of Nigeria regulatory submissions, representing institutions as nodes and interbank exposures as directed weighted edges. The endogenous risk problem is formulated as a stochastic network optimization model in which institution-level portfolio decisions constitute the control variables and system-wide expected loss is the objective, with network cascade dynamics modelled as a stochastic contagion process on the financial network. Original theoretical results characterize the relationship between network topology metrics and systemic risk sensitivity, extending existing results in financial network theory to the stochastic control setting. An original algorithm for computing systemic risk-minimizing portfolio policies under network externalities is developed and shown to converge. Empirical application calibrates the model using Nigerian financial system data for 2019 to 2024, identifying systemically important institutions, critical bilateral exposure concentrations, and the dynamic optimal macroprudential capital buffer policy. The dissertation advances operations research methodology for financial network analysis while providing original contributions directly relevant to Central Bank of Nigeria systemic risk oversight. Keywords: financial network, systemic risk, stochastic control, endogenous risk, Nigeria