CONTAGION IN HETEROGENEOUS FINANCIAL NETWORKS

Yuanying Guan () and Micah Pollak
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Yuanying Guan: Department of Mathematics and Actuarial Science, Indiana University Northwest, 3400 Broadway, Gary, IN 46408, USA
Micah Pollak: School of Business and Economics, Indiana University Northwest, 3400 Broadway, Gary, IN 46408, USA

Advances in Complex Systems (ACS), 2016, vol. 19, issue 01n02, 1-25

Abstract: In this paper, we use the financial network contagion model of Gai P. and Kapadia S. [Contagion in financial networks, Proc. R. Soc. A 466 (2010) 2401–2423] to investigatethe interaction of several types of heterogeneity found in real world banking systems. The first source of heterogeneity originates in the distribution of assets across banks in the financial system. The second source is in how individual banks then distribute these assets among their neighbors. We characterize how these two sources of heterogeneity interact to affect the probability and extent of financial contagions in three network structures. We find that greater heterogeneity has a stabilizing effect for networks that are sparsely connected and a destabilizing effect for networks that are highly interconnected. Finally, we consider multiple sequential shocks and find that when banks redistribute assets following an initial mild contagion it increases the stability, on average, of the system to subsequent shocks originating at weakened banks.

Keywords: Contagion; network models; systemic risk; financial crisis (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1142/S0219525916500016

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