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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…
In this paper, we propose a dynamical model to capture cascading failures among interconnected organizations in the global financial system. Failures can take the form of bankruptcies, defaults, and other insolvencies. The network that…
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…
The current global financial system forms a highly interconnected network where a default in one of its nodes can propagate to many other nodes, causing a catastrophic avalanche effect. In this paper we consider the problem of reducing the…
The aim of this paper is to quantify and manage systemic risk caused by default contagion in the interbank market. We model the market as a random directed network, where the vertices represent financial institutions and the weighted edges…
Systemic risk arises as a multi-layer network phenomenon. Layers represent direct financial exposures of various types, including interbank liabilities, derivative- or foreign exchange exposures. Another network layer of systemic risk…
Propagation of balance-sheet or cash-flow insolvency across financial institutions may be modeled as a cascade process on a network representing their mutual exposures. We derive rigorous asymptotic results for the magnitude of contagion in…
Many new models for measuring financial contagion have been presented recently. While these models have not been specified for investment funds directly, there are many similarities that could be explored to extend the models. In this work…
Banking system crises are complex events that in a short span of time can inflict extensive damage to banks themselves and to the external economy. The crisis literature has so far identified a number of distinct effects or channels that…
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…
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.…
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…
We develop a framework for price-mediated contagion in financial systems where banks are forced to liquidate assets to satisfy a risk-weight based capital adequacy requirement. In constructing this modeling framework, we introduce a…
Micro-structural models of contagion and systemic risk emphasize that shock propagation is inherently multi-channel, spanning counterparty exposures, short-term funding and roll-over risk, securities cross-holdings, and common-asset…
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…
We consider the problem of optimal investment and consumption in a class of multidimensional jump-diffusion models in which asset prices are subject to mutually exciting jump processes. This captures a type of contagion where each downward…
We study financial systems from a game-theoretic standpoint. A financial system is represented by a network, where nodes correspond to firms, and directed labeled edges correspond to debt contracts between them. The existence of cycles in…
As global financial markets become increasingly interconnected, financial contagion has developed into a major influencer of asset price dynamics. Motivated by this context, our study explores financial contagion both within and between…
This paper investigates two mechanisms of financial contagion that are, firstly, the correlated exposure of banks to the same source of risk, and secondly the direct exposure of banks in the interbank market. It will consider a random…
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…