Contagion and fire sales in banking networks

Sara Cecchetti (), Marco Rocco () and Laura Sigalotti ()
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Sara Cecchetti: Bank of Italy
Marco Rocco: Bank of Italy and European Central Bank
Laura Sigalotti: Bank of Italy

No 1050, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: The paper develops a theoretical framework to analyze the connection between the structure of banking networks and their resilience to systemic shocks. We base our analysis on the model of interbank contagion proposed by Cifuentes, Ferrucci and Shin (2005), which accounts for the impact of illiquid assets' fire sales. We develop this model along three main lines: (i) analytically proving, in a general setting, the existence of an equilibrium and the convergence of the algorithm that can be used to compute it; (ii) extending the scope of the simulations (e.g., including an assessment of the resilience of different stylized network topologies and a sensitivity analysis); (iii) generalizing the model to deal with the case where more than one illiquid asset is available on the market.

Keywords: financial networks; contagion; liquidity; fire sales; systemic risk (search for similar items in EconPapers)
JEL-codes: C62 D85 G21 G28 (search for similar items in EconPapers)
Date: 2016-01
New Economics Papers: this item is included in nep-ban, nep-cmp and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_1050_16

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