Related papers: Rigidity and default in production networks
An economy-wide production network, manifested through monetary input-output coefficients, inherently destabilizes during the general equilibrium propagation of sectoral productivity shocks when substitution elasticities are non-neutral.…
In this paper we analyze the resilience of a network of banks to joint price fluctuations of the external assets in which they have shared exposures, and evaluate the worst-case effects of the possible default contagion. Indeed, when the…
We study how idiosyncratic firm-level shocks generate aggregate volatility and tail risk when they propagate through a production network under overlapping adjustment: new productivity draws arrive before the economy reaches the static…
We study the disequilibrium dynamics of a stylised model of production networks in which firms use perishable and non-substitutable intermediate inputs, so that adverse idiosyncratic productivity shocks can trigger downstream shortages and…
We analyze cascades of defaults in an interbank loan market. The novel feature of this study is that the network structure and the size distribution of banks are derived from empirical data. We find that the ability of a defaulted…
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…
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…
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…
Although standard economics textbooks are seldom interested in production networks, modern economies are more and more based upon suppliers/customers interactions. One can consider entire sectors of the economy as generalised supply chains.…
The scale and terms of aggregate borrowing in an economy depend on the manner in which wealth is distributed across potential creditors with heterogeneous beliefs about the future. This distribution evolves over time as uncertainty is…
Economic models with input-output networks assume that firm or sector (unit) growth is driven by a weighted sum of trade partners' growth and an independently-drawn idiosyncratic shock. I show that the idiosyncratic risk assumption in a…
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…
Assessing the resilience of the economy requires accounting for its intrinsic multi-layer nature, by assessing for instance how disruptions at the firm level spread through the production network and propagate to the banking sector. Methods…
Inspired by the bankruptcy of Lehman Brothers and its consequences on the global financial system, we develop a simple model in which the Lehman default event is quantified as having an almost immediate effect in worsening the credit…
Why do capitalist economies recurrently generate crises whose severity is disproportionate to the size of the triggering shock? This paper proposes a structural answer grounded in the evolutionary geometry of production networks. As…
Many-body systems can have multiple equilibria. Though the energy of equilibria might be the same, still systems may resist to switch from an unfavored equilibrium to a favored one. In this paper we investigate occurrence of such phenomenon…
This paper develops a Hall-Sandpile model of economic instability that combines a Hall-like transversal stress mechanism with sandpile threshold dynamics on a real production-network substrate. In analogy with the physical Hall effect,…
The recent financial crisis of 2008 and the 2011 indebtedness of Greece highlight the importance of understanding the structure of the global financial network. In this paper we set out to analyze and characterize this network, as captured…
One of the most defining features of the global financial network is its inherent complex and intertwined structure. From the perspective of systemic risk it is important to understand the influence of this network structure on default…
The DebtRank algorithm has been increasingly investigated as a method to estimate the impact of shocks in financial networks, as it overcomes the limitations of the traditional default-cascade approaches. Here we formulate a dynamical…