A stochastic coarse-grained liquidity model for local distress propagation in financial networks

Pol Arenas-Garcia and Alex Arenas

Chaos, Solitons & Fractals, 2026, vol. 210, issue P2

Abstract: Understanding how financial distress spreads through financial networks remains a difficult problem, since liquidity depends both on market volatility and on the network of payment obligations linking firms. In this work, we study a discrete-time stochastic liquidity model, in which incoming and outgoing payments are activated separately for each firm, allowing for asynchronous transaction opportunities. To analyze the model, we introduce a coarse-grained two-node description where a reference firm interacts with an effective market node representing the rest of the network. This reduced setting allows us to capture the main features of the liquidity dynamics, describe how average behavior and fluctuations depend on the model parameters, and derive explicit results for the distribution of liquidity and default risk. Numerical simulations support these predictions. Finally, returning to the full network model, we show that the default of one node can locally increase the vulnerability of its direct creditors by removing a promised payment. In this way, the model makes explicit the basic mechanism through which distress may propagate locally. These results clarify how volatility, payment imbalances, asynchronous transaction opportunities, and threshold effects interact in a stylized liquidity model, providing a tractable description of local financial fragility.

Keywords: Financial distress; Liquidity; Dynamical systems; Complex systems (search for similar items in EconPapers)
Date: 2026
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0960077926008672
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:chsofr:v:210:y:2026:i:p2:s0960077926008672

DOI: 10.1016/j.chaos.2026.118726

Access Statistics for this article

Chaos, Solitons & Fractals is currently edited by Stefano Boccaletti and Stelios Bekiros

More articles in Chaos, Solitons & Fractals from Elsevier
Bibliographic data for series maintained by Thayer, Thomas R. ().