Robust-yet-fragile: A simulation model on exposure and concentration at interbank networks

Bulent Ozel (), Mario Eboli (), Andrea Toto () and Andrea Teglio
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Bulent Ozel: Department of Economics, Universitat Jaume I, Castellón, Spain
Mario Eboli: Department of Economics, Gabriele d’Annunzio University, Italy
Andrea Toto: Department of Economics, Gabriele d’Annunzio University, Italy

No 2018/15, Working Papers from Economics Department, Universitat Jaume I, Castellón (Spain)

Abstract: This paper presents a layered simulation model and the results from its initial employment. In this study, we focus on financial contagion due to debt exposure and structural concentration at interbank networks. Our results suggest that a medium density of connections in regular networks is already sufficient to induce a ’robust-yet-fragile’ response to insolvency shocks, while the same occurs in star networks only when the centralization is very high. The simulation model enables us to create stock-flow-consistent interbank networks with desired level of network connectivity and centralization. A parsimonious set of network configuration parameters can be employed not only to create stylized network structures with exact connectivity and centralization features but also random core-periphery network representations of a two-tier banking system. Our generic setup decouples the steps of a research on financial contagion. The layers of the simulator covers phases of a research from interbank network configuration to probing the details of a contagion. The presented version enables researchers (i) to create an interbank system of a desired network structure, (ii) to initialize bank balance sheets where the network in previous step can optionally be used as an input, (iii) to configure a controlled or randomized sequence of exogenous shock vectors, (iv) to simulate and inspect detailed process of a single contagion process via tables, graphs and plots generated by the simulator, (v) to design and run automated Monte Carlo simulations, (vi) to analyze results of Monte Carlo simulations via tools from the simulation analysis library.

Keywords: Contagion; interbank networks; two-tear systems; core-periphery networks (search for similar items in EconPapers)
JEL-codes: C32 C63 D53 D85 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2018
New Economics Papers: this item is included in nep-cmp and nep-ict
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