A network model of financial system resilience

Kartik Anand, Prasanna Gai, Sujit Kapadia, Simon Brennan and Matthew Willison

Journal of Economic Behavior & Organization, 2013, vol. 85, issue C, 219-235

Abstract: We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylized financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents – domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector data, this preliminarily model generates broadly sensible aggregate loss distributions which are bimodal in nature. We demonstrate how systemic crises may occur and analyse how our results are influenced by firesale externalities and the feedback effects from curtailed lending in the macroeconomy. We also illustrate the resilience of our model financial system to stress scenarios with sharply rising corporate default rates and falling asset prices.

Keywords: Contagion; Financial crises; Network models; Systemic risk (search for similar items in EconPapers)
JEL-codes: C63 G01 G17 G21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (48)

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Related works:
Working Paper: A network model of financial system resilience (2012)
Working Paper: A network model of financial system resilience (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:85:y:2013:i:c:p:219-235

DOI: 10.1016/j.jebo.2012.04.006

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