Modeling contagion in the Eurozone crisis via dynamical systems
Giuseppe Castellacci and
Journal of Banking & Finance, 2015, vol. 50, issue C, 400-410
We recently (Castellacci and Choi, 2013) formulated a theoretical framework for the modeling of financial instability contagion using the theories of dynamical systems. Here, our main goal is to model the Eurozone financial crisis within that framework. The underlying system comprises many economic agents that belong to several subsystems. In each instantiation of this framework, the hierarchy and nesting of the subsystems is dictated by the nature of the problem at hand. We describe in great detail how a suitable model can be set up for the Eurozone crisis. The dynamical system is defined by the evolution of the wealths of the individual agents and can be estimated by solving a nonlinear programming problem that incorporates features of prospect theory. Contagion is formulated in terms of how the market instability indicators for the different subsystems and the global system behave. We present several scenarios tailored to recent financial developments in the Eurozone and discussed within our model. These all point to the key role played by the elasticity coefficients of the wealth dynamical system. Accordingly, we put forward general recommendations on how regulators or other super-systemic agents may act to prevent and forestall the spreading of financial distress.
Keywords: Multi-agent models; Dynamical systems; Bifurcation; Market instability indicator; Sovereign credit; Systemic risk; Contagion (search for similar items in EconPapers)
JEL-codes: E10 G01 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (4) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:50:y:2015:i:c:p:400-410
Access Statistics for this article
Journal of Banking & Finance is currently edited by Ike Mathur
More articles in Journal of Banking & Finance from Elsevier
Series data maintained by Dana Niculescu ().