A Computational Framework for Financial Structures

Abstract

Financial structures transform stochastic cash-flow representations of underlying economic activities into ordered payments across multiple claims through systems of contractual allocation rules. While sophisticated computational models of such structures are widely used in practice, their allocation logic is typically embedded in proprietary implementations and deal-specific documentation, making systematic analysis, comparison, and verification across transactions difficult. This paper develops a computational framework that formalizes financial structures as structured allocation systems mapping stochastic inflows into hierarchically ordered payments through explicit and state-dependent allocation operators. The framework distinguishes between economic activities, financeable representations, admissible structures, feasible designs, and sustainable designs. It thereby specifies the inputs on which allocation mechanisms operate, the structural requirements that distinguish financial structures from generic contracts, and the feasibility restrictions under which a design may be undertaken.