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In [1] Zawadoski introduces a banking network model in which the asset and counter-party risks are treated separately and the banks hedge their assets risks by appropriate OTC contracts. In his model, each bank has only two counter-party…
We present a network-based framework for simulating systemic risk that considers shock propagation in banking systems. In particular, the framework allows the modeller to reflect a top-down framework where a shock to one bank in the system…
We consider the problem of risk diversification in complex networks. Nodes represent e.g. financial actors, whereas weighted links represent e.g. financial obligations (credits/debts). Each node has a risk to fail because of losses…
Trust lies at the crux of most economic transactions, with credit markets being a notable example. Drawing on insights from the literature on coordination games and network growth, we develop a simple model to clarify how trust breaks down…
The seniority of debt, which determines the order in which a bankrupt institution repays its debts, is an important and sometimes contentious feature of financial crises, yet its impact on system-wide stability is not well understood. We…
Different from the direct contact in epidemics spread, overload failures propagate through hidden functional dependencies. Many studies focused on the critical conditions and catastrophic consequences of cascading failures. However, to…
We study insolvency cascades in an interbank system when banks are allowed to insure their loans with credit default swaps (CDS) sold by other banks. We show that, by properly shifting financial exposures from one institution to another, a…
We study the causes and consequences of bank runs using a novel dataset of bank runs in the United States from 1863 to 1934. Applying large language models to historical newspapers, we identify 3,421 runs on individual banks. The resulting…
The recent financial crisis have generated renewed interests in fragilities of global financial networks among economists and regulatory authorities. In particular, a potential vulnerability of the financial networks is the "financial…
Internet finance is a new financial model that applies Internet technology to payment, capital borrowing and lending and transaction processing. In order to study the internal risks, this paper uses the Internet financial risk elements as…
In this paper, we employ Credit Default Swaps (CDS) to model the joint and conditional distress probabilities of banks in Europe and the U.S. using factor copulas. We propose multi-factor, structured factor, and factor-vine models where the…
In the last years, increasing efforts have been put into the development of effective stress tests to quantify the resilience of financial institutions. Here we propose a stress test methodology for central counterparties based on a network…
In network systems, a local perturbation can amplify as it propagates, potentially leading to a large-scale cascading failure. Here we derive a continuous model to advance our understanding of cascading failures in power-grid networks. The…
In spite of the growing theoretical literature on cascades of failures in interbank lending networks, empirical results seem to suggest that networks of direct exposures are not the major channel of financial contagion. In this paper we…
Evaluation of systemic risk in networks of financial institutions in general requires information of inter-institution financial exposures. In the framework of Debt Rank algorithm, we introduce an approximate method of systemic risk…
As it is known in the finance risk and macroeconomics literature, risk-sharing in large portfolios may increase the probability of creation of default clusters and of systemic risk. We review recent developments on mathematical and…
For large-scale power networks, the failure of particular transmission lines can offload power to other lines and cause self-protection trips to activate, instigating a cascade of line failures. In extreme cases, this can bring down the…
We live in a modern world supported by large, complex networks. Examples range from financial markets to communication and transportation systems. In many realistic situations the flow of physical quantities in the network, as characterized…
Cascading failures represent a fundamental threat to the integrity of complex systems, often precipitating a comprehensive collapse across diverse infrastructures and financial networks. This research articulates a robust and pragmatic…
This paper introduces a novel framework to study default dependence and systemic risk in a financial network that evolves over time. We analyse several indicators of risk, and develop a new latent space model to assess the health of key…