Related papers: Diversification and Endogenous Financial Networks
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…
Many economic activities are embedded in networks: sets of agents and the (often) rivalrous relationships connecting them to one another. Input sourcing by firms, interbank lending, scientific research, and job search are four examples,…
Common asset holdings are widely believed to have been the primary vector of contagion in the recent financial crisis. We develop a network approach to the amplification of financial contagion due to the combination of overlapping…
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…
Credit and liquidity risks represent main channels of financial contagion for interbank lending markets. On one hand, banks face potential losses whenever their counterparties are under distress and thus unable to fulfill their obligations.…
The 2008 financial crisis illustrated the need for a thorough, functional understanding of systemic risk in strongly interconnected financial structures. Dynamic processes on complex networks being intrinsically difficult, most recent…
Price-mediated contagion occurs when a positive feedback loop develops following a drop in asset prices which forces banks and other financial institutions to sell their holdings. Prior studies of such events fix the level of market…
Following the financial crisis of 2007-2008, a deep analogy between the origins of instability in financial systems and complex ecosystems has been pointed out: in both cases, topological features of network structures influence how easily…
We model a network economy with three sectors: downstream firms, upstream firms, and banks. Agents are linked by productive and credit relationships so that the behavior of one agent influences the behavior of the others through network…
We develop a structural default model for interconnected financial institutions in a probabilistic framework. For all possible network structures we characterize the joint default distribution of the system using Bayesian network…
We provide an overview of the relationship between financial networks and systemic risk. We present a taxonomy of different types of systemic risk, differentiating between direct externalities between financial organizations (e.g.,…
A modern version of Monetary Circuit Theory with a particular emphasis on stochastic underpinning mechanisms is developed. It is explained how money is created by the banking system as a whole and by individual banks. The role of central…
We study the incentives of banks in a financial network, where the network consists of debt contracts and credit default swaps (CDSs) between banks. One of the most important questions in such a system is the problem of deciding which of…
An asset network systemic risk (ANWSER) model is presented to investigate the impact of how shadow banks are intermingled in a financial system on the severity of financial contagion. Particularly, the focus of this study is the impact of…
We introduce a dynamic and stochastic interbank model with an endogenous notion of distress contagion, arising from rational worries about future defaults and ensuing losses. This entails a mark-to-market valuation adjustment for interbank…
We demonstrate diversification rather than optimisation for highly interacting organisms in a well mixed biological system by means of a simple model and reference to experiment, and find the cause to be the complex network of interactions…
In the wake of the still ongoing global financial crisis, bank interdependencies have come into focus in trying to assess linkages among banks and systemic risk. To date, such analysis has largely been based on numerical data. By contrast,…
In our model, private actors with interbank cash flows similar to, but nore general than (Carmona, Fouque, Sun, 2013) borrow from the outside economy at a certain interest rate, controlled by the central bank, and invest in risky assets.…
Assessing the stability of economic systems is a fundamental research focus in economics, that has become increasingly interdisciplinary in the currently troubled economic situation. In particular, much attention has been devoted to the…
We consider a banking network represented by a system of stochastic differential equations coupled by their drift. We assume a core-periphery structure, and that the banks in the core hold a bubbly asset. The banks in the periphery have not…