Related papers: Densely Entangled Financial Systems
We derive the default cascade model and the fire-sale spillover model in a unified interdependent framework. The interactions among banks include not only direct cross-holding, but also indirect dependency by holding mutual assets outside…
Financial networks are characterized by complex structures of mutual obligations. These obligations are fulfilled entirely or in part (when defaults occur) via a mechanism called clearing, which determines a set of payments that settle the…
The interbank market has a natural multiplex network representation. We employ a unique database of supervisory reports of Italian banks to the Banca d'Italia that includes all bilateral exposures broken down by maturity and by the secured…
We consider a random financial network with a large number of agents. The agents connect through credit instruments borrowed from each other or through direct lending, and these create the liabilities. The settlement of the debts of various…
In the new field of financial systemic risk, the network of interbank counterparty relationships can be described as a directed random graph. In "cascade models" of systemic risk, this "skeleton" acts as the medium through which financial…
We propose a new model of the liquidity driven banking system focusing on overnight interbank loans. This significant branch of the interbank market is commonly neglected in the banking system modeling and systemic risk analysis. We…
Networks of financial exposures are the key propagators of risk and distress among banks, but their empirical structure is not publicly available because of confidentiality. This limitation has triggered the development of methods of…
Excessive leverage, i.e. the abuse of debt financing, is considered one of the primary factors in the default of financial institutions. Systemic risk results from correlations between individual default probabilities that cannot be…
The abundance of data about social relationships allows the human behavior to be analyzed as any other natural phenomenon. Here we focus on balance theory, stating that social actors tend to avoid establishing cycles with an odd number of…
We consider thin incomplete financial markets, where traders with heterogeneous preferences and risk exposures have motive to behave strategically regarding the demand schedules they submit, thereby impacting prices and allocations. We…
It had been believed in the conventional practice that the risk of a bank going bankrupt is lessened in a straightforward manner by transferring the risk of loan defaults. But the failure of American International Group in 2008 posed a more…
The theory of multilayer networks is in its early stages, and its development provides vital methods for understanding complex systems. Multilayer networks, in their multiplex form, have been introduced within the last three years to…
Systemic risk in banking systems remains a crucial issue that it has not been completely understood. In our toy model, banks are exposed to two sources of risks, namely, market risk from their investments in assets external to the banking…
We consider two market designs for a network of prosumers, trading energy: (i) a centralized design which acts as a benchmark, and (ii) a peer-to-peer market design. High renewable energy penetration requires that the energy market design…
We introduce a probabilistic framework that represents stylized banking networks with the aim of predicting the size of contagion events. Most previous work on random financial networks assumes independent connections between banks, whereas…
Modern financial networks exhibit a high degree of interconnectedness and determining the causes of instability and contagion in financial networks is necessary to inform policy and avoid future financial collapse. In the American Economic…
We study how network structure affects the dynamics of collateral in presence of rehypothecation. We build a simple model wherein banks interact via chains of repo contracts and use their proprietary collateral or re-use the collateral…
Structural balance theory has been developed in sociology and psychology to explain how interacting agents, e.g., countries, political parties, opinionated individuals, with mixed trust and mistrust relationships evolve into polarized…
Systemic financial risk refers to the simultaneous failure or destabilization of multiple financial institutions, often triggered by contagion mechanisms or common exposures to shocks. In this paper, we present a dynamical model of bank…
We study the impact of central clearing of over-the-counter (OTC) transactions on counterparty exposures in a market with OTC transactions across several asset classes with heterogeneous characteristics. The impact of introducing a central…